Religiosity, CEO Overconfidence, and Labor investment Decisions

Abstract

We examine the impact of county-level religiosity on labor investment decisions. Specifically, we examine the effect of county-level religiosity on labor investment inefficiency. Drawing on the social norm theory, we hypothesize that firms located in religious counties do not engage in inefficient labor investment decisions. Consistent with this prediction, we find that county-level religiosity reduces inefficient labor investment. Utilizing the exogenous shock of the 2002 revelation of the Catholic Church’s sexual abuse scandal, we show a causal relationship between religiosity and inefficient labor investment. We also find that the negative impact of religiosity on inefficient labor investment decisions is weakened when the CEO is over-confident. Our findings suggest that religious beliefs and character traits of CEOs matter in corporate decision-making.

Keywords: Labor, social norm theory, religion, CEO overconfidence, corporate governance

JEL Classification: M51, M54, J24