Religion and Corporate Accounting Conservatism
Posted: 1 Jun 2017
Date Written: May 27, 2017
This paper studies how religion influences corporate accounting conservatism choice. Accounting conservatism is a mechanism to reduce the agency costs between the corporate insiders and outsiders. Religion potentially impacts firms’ accounting conservatism choice in two contradictory ways. On one hand, religion calls for risk aversion, which predicts that religion would enhance corporate accounting conservatism. On the other hand, religion, as a social norm, potentially impacts firms’ accounting conservatism choice by reducing the contracting demands for accounting conservatism. In this paper, we empirically find that: 1) the local religiosity of the headquarters of the firms is negatively correlated with the firms’ accounting conservatism measures; and 2) the negative correlation between religion and accounting conservatism is more pronounced for firms with higher leverage and higher earnings-based compensations. Our results are robust to alternative model specifications, and different conservatism and religious adherence measures. Our study highlights the important role of social norms in corporate accounting choices.
Keywords: Religion; Accounting Conservatism; Debt Contracting; Compensation Contracting
JEL Classification: M41; Z10; D82
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