Religiosity and Earnings Management: International Evidence from the Banking Industry

53 Pages Posted: 26 Mar 2014 Last revised: 16 Feb 2017

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Gerald J. Lobo

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

Chong Wang

University of Kentucky

Date Written: December 1, 2013

Abstract

Using an international sample of banks and country-level measures for several dimensions of religion, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss avoidance and just-meeting-or-beating prior year’s earnings. We also find that religiosity is negatively related to income-smoothing behavior of banks. In additional tests, we document that religiosity greatly increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007-2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance.

Keywords: Religion, Ethics, Morality, Earnings management, Earnings benchmarks, Loan loss provisions

JEL Classification: G14, G21, M41, M42

Suggested Citation

Kanagaretnam, Kiridaran and Lobo, Gerald J. and Wang, Chong, Religiosity and Earnings Management: International Evidence from the Banking Industry (December 1, 2013). Journal of Business Ethics, Vol. 132(2), 2015, Available at SSRN: https://ssrn.com/abstract=2413822 or http://dx.doi.org/10.2139/ssrn.2413822

Kiridaran Kanagaretnam (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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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