Religiosity, Shareholder Lawsuits, and Employee Whistleblowing

Abstract

We investigate how the level of religiosity in the county in which a firm is headquartered affects the incidence of shareholder lawsuits and employee whistleblowing. We hypothesize that the local religiosity promotes an environment in which employees are prone to be more truthful, less expedient and more prone to whistleblowing if their managers make untruthful disclosures and/or unethical decisions. Consequently, firm shareholders are more likely to trust managers by giving them the benefit of the doubt, which mitigates the prospective elements of the harmful deed and fraudulent intent associated with shareholder lawsuits. We find monetary incentives to be positively related to employee whistleblowing, but this effect disappears in religious firms. The effect of religiosity on lawsuits and whistleblowing is more pronounced. With weaker external monitoring. Collectively, these results are consistent with religiosity inducing a corporate environment with enhanced whistleblowing and ethical managerial decisions, leading to fewer outside shareholder lawsuits.

Keywords: religiosity, shareholder lawsuit, whistleblowing, corporate environment, corporate governance, external monitoring, QUI TAM

JEL Classification: M14, M41, M48