Firms headquartered in counties where residents report that religion is important in their daily lives exhibit less aggressive financial reporting, according to a study by three professors from Texas A&M University.

Sean McGuire

The study found that firms headquartered in highly religious areas, based on Gallup poll data, are less likely to engage in aggressive financial reporting. Religious social norms appear to be associated with lower accounting risk, lower unexplained audit fees, and lower likelihoods of accounting-related shareholder lawsuits.

The study found that the influence of religion on financial reporting occurs primarily among firms with low levels of external monitoring by financial analysts and institutional investors. Religiosity acts as a substitute mechanism for monitoring corporate behavior when external monitoring is low.

The research, written by Sean T. McGuire, Thomas C. Omer and Nathan Y. Sharp, of Texas A&M’s Mays Business School, also found evidence that firms in religious areas generally receive lower ratings for corporate social responsibility. “Firms in religious areas are less likely to receive high ratings for supporting the communities in which they are headquartered, less likely to embrace or support diversity in the ranks of their employees, and less likely to receive high ratings for employee relations,” said the study.

Additional analysis suggests that firms located in highly religious areas may be less likely to direct firm resources toward community projects because managers observe faith-based organizations playing an important role in these communities. The professors did not find a significant association between their measure of religiosity and social responsibility ratings pertaining to firms’ impact on the environment, however.