Kenneth Kim: Does religion matter in Corporate America?

(Forbes) Believe it or not, religion seems to matter in Corporate America. A recent study that is about to appear in the Journal of Financial and Quantitative Analysis finds that firms located in U.S. counties with high religiosity have higher credit ratings and lower debt costs compared to other firms. Interesting, right? I know, questions and maybe skepticism are now popping in your head.

The first question you might have is: What defines a U.S. county as having high religiosity? It is a county that has a high proportion of church members out of the entire population. In the study, the authors refer to firms located in such counties as high religiosity firms. The more important question that you might have is: How can a high religiosity firm end up having high credit ratings and low debt costs? The rationale is actually pretty straightforward. Religious people tend to take less risk, for example, they gamble less, and they are less likely to engage in inappropriate behaviors, for example, they are less likely to commit crimes.

If we believe that managers who live and work in high religiosity areas are influenced by their local culture, then it implies that they too may take less risk and engage less in inappropriate behaviors when it comes to their decision-making at work, regardless of whether or not they too are religious. Lenders actually seem to believe this, at least according to the recent study. Here’s an excerpt from their paper: “Lenders demand compensation for both the risk they bear and the agency problems they face. In an incomplete contracting setting where debtholders cannot verify or contract on a borrowing firm’s activities, religiosity can serve as a commitment device conveying the firm’s intention to conduct business honestly and conservatively. Debtholders in turn trust that high religiosity firms will have lower risk and fewer agency problems. Thus we expect to see that high religiosity firms have higher credit ratings and lower debt costs for both public bonds and bank loans.” In other words, all else equal, creditors such as banks think it is safe to lend to high religiosity firms. [More]