Religiosity and the Cost of Debt

49 Pages Posted: 13 Jan 2014

See all articles by Hanwen Chen

Hanwen Chen

University of International Business and Economics

Henry He Huang

Yeshiva University - Sy Syms School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Chong Wang

University of Kentucky

Date Written: January 12, 2014

Abstract

Prior research indicates that the cost of debt can be affected by a country’s institutional factors such as legal enforcement and political rights. It also shows that religion, an important determinant of a country’s culture, can influence both legal and political institutions and thus can affect the cost of debt indirectly. Since strong religiosity is associated with risk aversion and higher business ethics, we propose that religiosity can also directly reduce the cost of debt by mitigating borrowing firms’ earnings volatility, governance risk, and default risk. Based on bank loan data from 51 countries, we find that stronger religiosity, as measured by World Value Surveys, is associated with lower loan interest spread. We also document that this negative association is more pronounced for countries with stronger political rights, suggesting that such a political environment allows religious values to shape institutional factors and individual human behavior. Furthermore, given that all religions are characterized by risk aversion and high ethical standards, and that religious pluralism emphasizes these values, our findings show that religious diversity contributes to further reducing the cost of debt. Lastly, our analysis reveals that the increase in the cost of debt during the financial crisis is less pronounced for firms in countries with strong religiosity. Our study contributes to understanding the important role religiosity plays in debt financing.

Keywords: religiosity, cost of debt, political rights, religious diversity

JEL Classification: G12, G15

Suggested Citation

Chen, Hanwen and Huang, Henry and Lobo, Gerald J. and Wang, Chong, Religiosity and the Cost of Debt (January 12, 2014). Available at SSRN: https://ssrn.com/abstract=2378052

Hanwen Chen

University of International Business and Economics ( email )

10# Huixin East Street,Chaoyang District
Beijing, Beijing 100029
China

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Chong Wang

University of Kentucky ( email )

Lexington, KY 40506
United States

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