Religiosity and the Cost of Debt
49 Pages Posted: 13 Jan 2014
Date Written: January 12, 2014
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: Suggested Citation