Religious Neighbors Spark Good Behavior

BUSINESSES HEADQUARTERED in religious communities behave better than those that aren’t, whether or not their leaders are religious.

This is the finding of a study by Jeffrey Callen of the University of Toronto’s Rotman School of Management in Canada and Xiaohua Fang of Georgia State University’s Robinson College of Business in Atlanta.

The researchers analyzed data from the American Religion Data Archive, looking at the number of churches and rate of church membership in U.S. counties. They then looked at the number of account restatements and stock returns for U.S. companies. They found that companies headquartered in the most religious counties were less likely to conceal bad news—and, so, are also less likely to experience the stock price crashes that often follow the market’s sudden discovery of bad behavior.

Callen notes that companies can pay a high cost if they’re not upfront in a church-going community. “Where you have strong corporate governance, religion doesn’t need to kick in,” says Callen. “But where there is poor corporate governance, religion substitutes for it.”

“Religion and Stock Price Crash Risk” is forthcoming in the Journal of Financial and Quantitative Analysis. A working draft is available at ssrn.com/abstract=2001010. The paper reinforces a similar 2010 study by researchers Thomas Omer, Sean McGuire, and Nathan Sharp of the Mays Business School at Texas A&M University in College Station. (See “Religion Curtails Financial Fraud” on page 61 of the September/October 2010 issue of BizEd.)