Does Confucianism Reduce Corporate Over‐Investment? Evidence from China

In this study, we argue that Confucianism, as an informal institution, mitigates agency problems and thus curbs managerial over‐investment behavior. Using a sample of Chinese listed firms over the period 2000 to 2015, we find strong evidence that Confucianism is negatively associated with over‐investment. Furthermore, we document that the negative association between Confucianism and over‐investment is weaker for state‐owned enterprises than for non‐state‐owned enterprises. Overall, the findings enrich our understanding that informal institutions can play a significant role in influencing corporate behavior.