Religion and Stock Price Crash Risk

This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion, as a set of social norms, helps to curb bad news hoarding activities by managers. Our evidence further shows that the negative relation between religiosity and future crash risk is stronger for riskier firms and for firms with weaker governance mechanisms measured by shareholder takeover rights and dedicated institutional ownership. To ensure that the stock price crashes are a consequence of bad news hoarding, we show that firms that restated accounting data and suffered a resulting stock price crash experience significantly larger income decreases and are less likely to be from a religious milieu by comparison to matched samples including firms that restated but did not suffer a stock price crash