Religiosity and Earnings Management : International Evidence from the Banking Industry

Using an international sample of banks and country-level measures for several dimensions of religion, 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 is negatively related to income-smoothing behavior of banks. In additional tests, we document that religiosity greatly 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