The Impact of Religiosity on Earnings Quality: International Evidence from the Banking Sector

Abstract

We examine the impact of religiosity on earnings quality, utilising a global sample of 1,283 listed banks headquartered in 39 countries and covering the period 2002–2018. Using instrumental variables two-stage least squares regressions, we demonstrate that religiosity has a significant positive impact on banks’ earnings quality. We further show that the impact of religiosity becomes more pronounced among banks headquartered in countries where religion is an important element of national identity and in countries with weak legal protection. We show that the effects of religiosity are more intense during the global financial crisis period. Overall, these findings support the notion that high religiosity tends to reduce unethical activities by managers and can function as an alternative control mechanism for minimising agency costs. Our empirical investigation is robust to alternative model sample specification.

Keywords: Religiosity, earnings quality, informal institutions, institutional environment, social norms theory

JEL Classification: G21, M41, Z12