Researchers at the University of Toronto’s Rotman School of Management have found that religious communities tend to have the most “honest” businesses.
According to the study, businesses in religious communities are less likely to not disclose bad financial news, regardless of whether the top people in the business are religious themselves.
The results suggest that businesses in religious communities are influenced by the social norms in that area.
Authors of the study, Jeffrey Callen, editor of Contemporary Accounting Research, and Xiaohua Fang, assistant business professor at Georgia State University, said that “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.”
The team made a comparison between the number of churches in certain U.S. counties and how companies in these counties provided information about stock returns and accounting restatements.
Previous studies have found that managers who are religious are less likely to falsify business information. In addition, there tends to be more whistleblowers in businesses located in religious communities.
However, this is the first study of its kind to evaluate whether the location of a business has any influence of “bad news hoarding”.
Despite being an orthodox Jew, Prof. Callen was very surprised by the findings.
Prof. Callen said that “where you have strong corporate governance, religion doesn’t need to kick in. But where there is poor corporate governance, religion substitutes for it.”
He added that “social norms of all types are going to be useful to minimize all sorts of bad behaviour by firms.”
In conclusion these findings suggest that the location of a business can have an effect on its honesty.
The report will shortly be published in the Journal of Financial and Quantitative Analysis.