Religiosity and Earnings Management: International Evidence from the Banking Industry

Kiridaran Kanagaretnam, Gerald J. Lobo, Chong Wang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

58 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)277-296
Number of pages20
JournalJournal of Business Ethics
Volume132
Issue number2
DOIs
Publication statusPublished - 1 Dec 2015
Externally publishedYes

Keywords

  • Earnings benchmarks
  • Earnings management
  • Ethics
  • Loan loss provisions
  • Morality
  • Religion

ASJC Scopus subject areas

  • Business and International Management
  • Business, Management and Accounting(all)
  • Arts and Humanities (miscellaneous)
  • Economics and Econometrics
  • Law

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