Ethical substitutes or institutional frictions? Confucian culture, marketization, and internal control effectiveness

This study explores the governance implications of Confucian culture on internal control effectiveness in Chinese listed firms from 2012 to 2021, drawing on informal institutional theory. Moving beyond reliance on single proxy variables, we operationalize Confucian culture by decomposing it into the “Five Constant Virtues” (Ren, Yi, Li, Zhi, Xin). We construct a weighted index using the Analytic Hierarchy Process (AHP), assigning the highest weight to “Xin” (Trust) based on the logic of corporate survival. By integrating expert-based AHP weighting with textual big data from annual reports, we significantly enhance the external validity of our cultural measurement. Empirical results reveal that Confucian culture significantly improves internal control, functioning as an ethical substitute for formal institutions in weak rule-of-law environments. Conversely, its governance utility is significantly weakened in highly marketized regions, suggesting institutional friction between relationship-based norms and market principles. Heterogeneity analysis further shows that Confucian values exert a stronger positive effect in state-owned enterprises. These findings underscore the situational duality of informal institutions and highlight the complex role of Confucian ethics in hybrid governance systems. This study contributes to cross-cultural corporate governance literature by providing a nuanced framework for ethical-institutional alignment and proposing differentiated governance strategies across diverse institutional contexts.