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Religion And Corporate America – Forbes

Believe it or not, religion seems to matter in Corporate America. A recent study that is about to appear in the Journal of Financial and Quantitative Analysis finds that firms located in U.S. counties with high religiosity have higher credit ratings and lower debt costs compared to other firms. Interesting, right? I know, questions and maybe skepticism are now popping in your head.

The first question you might have is: What defines a U.S. county as having high religiosity? It is a county that has a high proportion of church members out of the entire population. In the study, the authors refer to firms located in such counties as high religiosity firms. The more important question that you might have is: How can a high religiosity firm end up having high credit ratings and low debt costs? The rationale is actually pretty straightforward. Religious people tend to take less risk, for example, they gamble less, and they are less likely to engage in inappropriate behaviors, for example, they are less likely to commit crimes. If we believe that managers who live and work in high religiosity areas are influenced by their local culture, then it implies that they too may take less risk and engage less in inappropriate behaviors when it comes to their decision-making at work, regardless of whether or not they too are religious. Lenders actually seem to believe this, at least according to the recent study. Here’s an excerpt from their paper: “Lenders demand compensation for both the risk they bear and the agency problems they face. In an incomplete contracting setting where debtholders cannot verify or contract on a borrowing firm’s activities, religiosity can serve as a commitment device conveying the firm’s intention to conduct business honestly and conservatively. Debtholders in turn trust that high religiosity firms will have lower risk and fewer agency problems. Thus we expect to see that high religiosity firms have higher credit ratings and lower debt costs for both public bonds and bank loans.” In other words, all else equal, creditors such as banks think it is safe to lend to high religiosity firms.  

You might think that it is silly that religion can matter when it comes to Corporate America. In fact, I too was a little bit skeptical when I first saw the study. However, as I was reading the study, it reminded me of a time when I loaned someone quite a bit of money. A friend of mine questioned my loan, asking me how I knew I would be paid back. I replied, “That guy is super religious. I’m sure he will pay me back.” (In case you’re wondering, he did pay me back.) So, I realized that too am guilty of associating religiosity with trust. Maybe it’s rational. And besides, there are now a lot of studies that find that corporate culture can affect firms’ decision-making and firms’ profits. For example, another recent study finds that when employees perceive their managers to be trustworthy and ethical, then the firm enjoys stronger profitability. With regard to religiosity and risk-taking specifically, a few years back a study actually did find that firms in U.S. counties with high religiosity did engage in less risk taking. When I saw that study, I decided to test their proposition using data from China. Indeed, I found that Chinese family firms with religious founders were less likely to take risks. So, not only does religion seem to matter for Corporate America, it might matter in other countries as well.

By now, you might be wondering if I have an overall point, take-away, or some advice to offer. For example, you might think that I will advise you to ask your financial adviser, babysitter, hair stylist, drycleaner, auto mechanic, food server, landlord, used car salesperson, etc., if they are religious. Nah, I won’t go that far. I think my hair stylist is great, and I think he is an atheist.

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Religion And Corporate America – Forbes

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