If you are looking for honest companies to invest in, check out businesses based in more religious communities, suggests a new paper.
The paper says that businesses with head offices in places with high levels of "religiosity" were less likely to experience stock price crashes as a result of not disclosing bad financial news. And it didn't matter whether those at the top were religious or not. Just being in a town where social norms are influenced by religious codes of behavior was enough to rub off on the companies operating there.
"There is nothing quicker to losing your good name in a religious milieu than doing something like withholding bad news and not being upfront. There's a real cost," said Prof. Jeffrey Callen, professor in Accounting at the University of Toronto's Rotman School of Management, who co-wrote the paper with Xiaohua Fang, assistant business professor at Georgia State University.
The researchers used data from 1971 to 2000 about the number of churches and church membership in U.S. counties from the American Religion Data Archive. They compared this with information about stock returns and accounting restatements for U.S. companies, including where those companies were headquartered.
Previous research has shown that religious managers are less likely to manipulate the flow of information and a religious setting tends to foster more whistle blowers within a corporation, raising the risk of manipulators getting caught.
Jeffrey L. Callen hold the Joseph L. Rotman Chair of Accounting at the University of Toronto. His research interests include corporate valuation, accounting information and capital markets, efficiency measurement and the non-profit firm. He is the former Editor-in-Chief of the Journal of Accounting, Auditing and Finance. Currently he is an Editor of Contemporary Accounting Research, a Co-Editor of the International Journal of Accounting, and an Associate Editor of the Multinational Finance Journal. He serves on the editorial boards of the Accounting Review, China Journal of Accounting Research, International Journal of Disclosure and Governance and the ARN and FEN networks.Credit: Rotman School.
The researchers' own finding of a strong correlation between religiosity and a low risk of stock price crash due to bad news "hoarding," was particularly strong among companies with weak governance.
"Where you have strong corporate governance, religion doesn't need to kick in," said Callen. "But where there is poor corporate governance, religion substitutes for it."
However, they caution that the paper should not be taken to suggest that religious people are more moral than others.
"Social norms of all types are going to be useful to minimize all sorts of bad behavior by firms," he said.
The paper is forthcoming in the Journal of Financial and Quantitative Analysis.