The Effect of Religion on Accounting Conservatism

Abstract

This paper investigates whether religiosity, a key informal institutional factor, strongly influences a firm’s adoption of accounting conservatism. Using a sample from the U.S. stock market, we find that firms located in geographic areas with higher levels of religiosity tend to exhibit greater accounting conservatism. Further tests show that this effect is through the channel of engaging managers in activities that emphasize firms’ long-term growth, concern stakeholder interests, and avoid the risk of litigation. Moreover, we demonstrate that it is the religious environment in an area rather than the personal religious belief of a CEO that drives our baseline results. Finally, a supplementary test suggests that religiosity increases not only the conditional (ex post) conservatism of firms but their unconditional (ex ante) conservatism as well.