Does Religiosity Improve Analyst Forecast Accuracy?

Abstract

This paper studies the impact of local religiosity on analyst forecast accuracy. Using the level of religious adherence as a proxy for religiosity in firm headquarter states, we find that analyst forecasts are more accurate for firms located in areas with stronger religious social norms. Our finding is robust to the inclusion of analyst and regional characteristics, firm, industry, and state fixed effects, controlling for earnings quality and audit quality, 2SLS-instrumental variable estimation, propensity score matching analysis, and a difference-in-difference test using firm headquarter relocations as a quasi-natural experiment. We further document a novel finding that religiosity has an “accentuating effect” on analyst forecast accuracy: religion can make a good thing better. Specifically, we find that local religiosity has a more pronounced positive effect on firms issuing management guidance or having fewer agency problems. Finally, we find that analyst forecast revisions for firms in more religious areas have higher information content. Overall, our study shows that religiosity enhances the accuracy and information content of analyst forecasts.

Keywords: Religion, analyst forecasts, corporate culture, ethicality

JEL Classification: G17, M14, Z12