The Impact of Religion on Financial Reporting Irregularities

48 Pages Posted: 20 Aug 2011 Last revised: 14 May 2013

Sean T. McGuire

Texas A&M University - Department of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Nathan Y. Sharp

Texas A&M University - Department of Accounting

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Date Written: April 2011

Abstract

This paper examines the impact of religion on financial reporting. We predict that firms in religious areas are less likely to engage in financial reporting irregularities because prior research links religiosity to reduced acceptance of unethical business practices and because managers in religious areas are likely to be more averse to litigation risk. Our results suggest that firms headquartered in areas with strong religious social norms generally experience lower incidences of financial reporting irregularities. We also examine whether religiosity influences managers’ methods of managing earnings. Although we find a negative association between religiosity and abnormal accruals, we find a positive association between religiosity and two measures of real earnings management, suggesting managers in religious areas may prefer real earnings management over accruals manipulation. We provide evidence that our results are not driven by firms headquartered in rural areas and conclude that religious social norms represent a mechanism for reducing costly agency conflicts, particularly when other external monitoring is low.

Keywords: religion, financial reporting irregularities, earnings management, monitoring, religious social norms

JEL Classification: M41, M14

Suggested Citation

McGuire, Sean T. and Omer, Thomas C. and Sharp, Nathan Y., The Impact of Religion on Financial Reporting Irregularities (April 2011). Available at SSRN: https://ssrn.com/abstract=1548154 or http://dx.doi.org/10.2139/ssrn.1548154

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Nathan Y. Sharp (Contact Author)

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

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