Increased religiosity, decreased fraud
Firm’s location can predict the likelihood of fraud
By • June 29th, 2010 • Category: Research Notes

When you’re evaluating the risks associated with investing in a company, one item you may not have thought to consider is its location relative to the Bible Belt. However, that may be a salient detail, if you’re worried about fraud.

Sean McGuire
McGuire

New research from Mays accounting faculty members Sean McGuire, Thomas Omer, and Nathan Sharp suggests that firms headquartered in counties where residents report that religion is important in their daily lives exhibit less aggressive financial reporting.

This is especially true in small-to-medium sized firms that have less external monitoring from financial analysts. For such companies, religion can act as a substitute for other monitoring.

There is a significant association between the measure of a county’s religiosity and measures of aggressive reporting, including shareholder litigation related to accounting malfeasance. In fact, after controlling for other firm and county characteristics, they find that an approximate 10 percent increase in the population that indicate religion is important to their daily lives results in a 48.8 percent decrease in the odds that a firm headquartered in that county is sued for accounting malfeasance.

Thomas Omer
Omer

Which states overall reported the highest numbers of residents claiming religion was important in their daily lives? The top ten are all Bible Belt states, with Mississippi (86 percent), Alabama (84 percent), and Tennessee (79 percent) in the first three spots. At the bottom of the list by this measure are Alaska (48 percent), Vermont (46 percent), and New York (44 percent). Texas is number 13 on the list, with 71.9 percent of residents reporting religion is important in their daily life. The religion data were collected by Gallup, Inc.

Another finding of note is that firms located in more religious counties scored lower on measures of corporate social responsibility, including support for the community and diversity initiatives. On the surface, this seems surprising: shouldn’t firms where religion has an impact show higher levels of corporate social responsibility? The researchers hypothesize that this finding may be easily explained: in more religious counties, there is likely less need for corporate involvement in providing for needs within the community, as those activities are already being addressed by religious groups. Also, if a company’s CEO or other managers are already involved in community efforts personally through a religious group, they may not see the need to involve the corporation.

Nathan Sharp
Sharp

While the religiosity of the county where a firm is headquartered is significantly related to fraud risk in a large sample of firms, Sharp notes that it is only one of many factors potential investors must examine. It is significant, he says, but one should not invest solely on this criteria.

For more information

For more information, contact Sean McGuire, Thomas Omer, or Nathan Sharp.

“The Influence of Religion on Aggressive Financial Reporting and Corporate Social Responsibility” is a working paper. In the first few months it was hosted on the Social Science Resource Network website, it was downloaded more than 100 times.

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