Can social norms give rise to distorted information in China? We observe that China’s leading social norm related to alcohol consumption and social drinking enhances earnings management. An analysis of toxic alcohol scandals supports a causal interpretation. Further evidence suggests that the influence of alcohol may come from the negative externality that it creates, which is propagated by corporate leaders and cannot be attenuated by market-oriented institutions. Our results reveal a social norm externality that may have important normative implications.

China's split‐share reform of 2005 (the Reform) converts the previously restricted shares held by founding shareholders to shares tradable on the open market. Against this backdrop, we study how underwriter‐affiliated analysts and firms' large shareholders interact in the event of the latter's sales of restricted shares. We document that recommendations made by affiliated analysts are significantly more optimistic when firms' large shareholders plan to sell their restricted shares. This optimism, however, is associated with negative post‐sale stock returns, suggesting large shareholders profit from share sales. Furthermore, large shareholders sell more restricted shares through the affiliated brokerages for which analysts have issued more optimistic recommendations and firms under their control are more likely to appoint such brokerages as lead underwriters when they refinance in the future. The affiliated analysts also conduct more site visits to the firms after the share sales, thereby improving their earnings‐forecast accuracy. Our analysis shows how conflicts of interest by financial intermediaries arise following the Reform and lead to large shareholders' extraction of rents from public investors.

We study how the presence of short sellers affects the incentives of the insiders to trade on negative information. We show it induces insiders to sell more (shares from their existing stakes) and trade faster to preempt the potential competition from short sellers. An experiment and instrumental variable analysis confirm this causal relationship. The effects are stronger for “opportunistic” (i.e., more informed) insider trades and when short sellers׳ attention is high. Return predictability of insider sales only occurs in stocks with high short-selling potential, suggesting that short sellers indirectly enhance the speed of information dissemination by accelerating trading by insiders.