Religiosity and Earnings Management: International Evidence from the Banking Industry

Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we...

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Bibliographic Details
Published in:Journal of business ethics 2015-12, Vol.132 (2), p.277-296
Main Authors: Kanagaretnam, Kiridaran, Lobo, Gerald J., Wang, Chong
Format: Article
Language:English
Subjects:
Bank earnings
Banking
Banking industry
Business and Management
Business Ethics
Cash flow
Culture
Deterrence
Earnings management
Education
Ethics
Expectations
Income
Management
Morality
Philosophy
Probability
Quality of Life Research
Regulatory agencies
Religion
Religiosity
Risk
Studies
Citations: Items that this one cites
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Summary:Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating prior year's earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007–2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance.
ISSN:0167-4544
1573-0697
DOI:10.1007/s10551-014-2310-9