Does Religiosity Enhance the Quality of Management Earnings Forecasts?

39 Pages Posted: 30 Sep 2020

See all articles by Lamia Chourou

Lamia Chourou

University of Ottawa

He-san Luo

Southern Medical University - Department of Radiation Oncology

Ligang Zhong

University of Windsor - Odette School of Business

Date Written: July-August 2020

Abstract

This study investigates whether firms located in areas with higher levels of religiosity disclose higher‐quality management earnings forecasts than do other firms. Using a US sample of 4,655 firm‐year observations over the period 2001 to 2014, we find that firms headquartered in counties with higher proportions of religious adherents issue earnings forecasts that are less optimistically biased and that the effect of religiosity is concentrated in firms with weak monitoring mechanisms. We also find that religiosity mitigates pessimistic bias in management earnings forecasts, but only for those issued by firms operating in low litigation industries. This result suggests that when the litigation risk is high, both ethicality and risk aversion are at work and their competing effects likely offset each other. Additionally, we document that forecasts issued by firms in more religious areas trigger stronger stock price reactions than those issued by other firms and that the effect is limited to forecasts containing optimistic bias. Overall, our results show that religiosity enhances the quality of management earnings forecasts, but the effect varies based on different conditions.

Keywords: Ethicality, management earnings forecasts, market reaction, religiosity, risk aversion, voluntary disclosure

Suggested Citation

Chourou, Lamia and Luo, He-san and Zhong, Ligang, Does Religiosity Enhance the Quality of Management Earnings Forecasts? (July-August 2020). Journal of Business Finance & Accounting, Vol. 47, Issue 7-8, pp. 910-948, 2020, Available at SSRN: https://ssrn.com/abstract=3700039 or http://dx.doi.org/10.1111/jbfa.12446

Lamia Chourou

University of Ottawa ( email )

He-san Luo

Southern Medical University - Department of Radiation Oncology

Guangzhou
China

Ligang Zhong (Contact Author)

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada

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