Local religiousness and labor cost : How religious social norms shape corporate labor investment behavior

This study examines the role of religion in explaining corporate labor decisions. In particular, we investigate whether local religiousness explains how firms respond to demand changes in terms of labor investment and whether it is associated with labor investment efficiency. Based on data from German private firms in the time period 2009 to 2015, we find that firms located in religious areas react less sensitive to economic upturns and more sensitive to economic downturns in terms of labor investment, which can be explained by a higher degree of conservatism and a stronger ethical sense. The results suggest that local religiousness reduces the typical tendency of managers to overinvest. Consistently, we find that firms located in religious areas are characterized by higher labor investment efficiency, enhancing productivity. However, this only holds in case of low unemployment at firm location. For high unemployment, local religiousness is unrelated to labor investment efficiency, underlining the relevance of business ethics in corporate decision-making. Our study contributes to research on religion and corporate investments by investigating the role of local religiousness in shaping firms' investments in human capital as one type of managerial decisions characterized by a particularly high level of moral intensity