1. Introduction & Literature Review
How important is top-management religiosity, and how does it impact business decision-making and information-sharing transparency? The topic of religion has been studied in varying capacities within multiple sub-disciplines of the broader social science literature since the late 1700s (
Smith 1776). One potential explanation for this multi-stream focus lies in the connection between religion and human rationale (
Smith 1776;
Jung 1960). This connection has significant economic, psychological, and social implications for modern-day norms, behavior, and business practices (
Anderson 1988;
Wulff 1991;
Sunstein 1996;
Beit-Hallahmi and Argyle 1997;
Iannaccone 1998;
Kennedy and Lawton 1998;
Guiso et al. 2003;
Stulz and Williamson 2003). These far-reaching implications of religion on society and business may potentially explain the multiple sub-disciplinary foci of religion within the social sciences.
Recent studies examining religion’s influence on business practices are generally clustered within the accounting or finance domain. These studies typically use location-based proxies for religiosity based on firm headquarters locations to examine how religion affects the quality of accounting, financial reporting practices, financial decision-making, or other observable indicators of quality of business practices. The consensus within the literature appears to be that religion has positive firm-level implications. In other words, firms that have headquarters in highly religious locations have less litigation, lower restatement rates, higher quality of management forecasts, higher quality of accruals, and less opportunistic earnings management (
Grullon et al. 2009;
Dyreng et al. 2012;
McGuire et al. 2012;
Du et al. 2015;
Chourou et al. 2020). Measures of firm headquarter location-based religiosity also have been associated with positive audit-related implications for firms, as evidenced by the lower number of going-concern reports issued by auditors and lower audit fees charged by auditors to clients who are based in highly religious areas (
Leventis et al. 2018;
Omer et al. 2018). Corporations based in religious areas generally find it easier to raise debt financing (
Chen et al. 2016a;
He and Hu 2016;
Jiang et al. 2018;
Cai and Shi 2019). Corporations headquartered in religious areas also tend to make less risky decisions as evidenced by their greater focus on long-term growth, litigation risk minimization, shareholder wealth creation, and less risky innovation (
Hilary and Hui 2009;
Al Rahahleh et al. 2019;
Ma et al. 2020).
However, this location-based approach to measuring religiosity has limitations, which has created another avenue for research in recent years. Location-based studies assume that the religious beliefs and viewpoints of the majority of the inhabitants in a county are reflected in corporate decisions. However, these extant studies fail to demonstrate how the locational effect of religion translates to the firm level (
Baxamusa and Jalal 2016;
Cai et al. 2019;
Chen et al. 2022). In other words, these research papers fail to consider the religious affiliations of the firm’s decision-makers themselves (
Baxamusa and Jalal 2016;
Cai et al. 2019;
Chen et al. 2022). Thus, the potential for misclassification of the religiosity of firm decision makers exists if a firm is classified as being religious solely based on its geographic location when its CEO or other C-suite members are not religious. Location-based studies also ignore that a C-suite executive’s religion may differ from the affiliation of the majority of inhabitants of a given county (
Baxamusa and Jalal 2016). For example, a positive firm-level implication may be attributed to Christianity, the dominant religion in most counties within the U.S.A. (
America’s Changing Religious Landscape 2015). However, in reality, it could be the decision-making quality of a religious CEO belonging to a non-Christian religious denomination that, in essence, drives previous findings. Thus, capturing religiosity at the executive or decision-maker level helps to solve these misclassification issues associated with the location-based religiosity measure, as suggested by
Baxamusa and Jalal (
2016),
Cai et al. (
2019) and
Chen et al. (
2022). Capturing religiosity at the individual level also shows that the effect of religiosity is not solely driven by the adherents of the religious group that constitutes the majority within a given locale. Overall, this measurement issue involving religiosity constitutes one of the three core motivations for this study.
The second motivation stems from the connection between the broader disclosure literature and religion. Although recent studies have examined how religion affects disclosure practices, there are gaps in the literature. These studies generally examine how religion affects disclosure practices using disclosure length of annual report sections (
Aribi and Gao 2012;
Elamer et al. 2020), earnings management and timely loss recognition, or optimism of management earnings forecasts (
Chourou et al. 2020;
Oh and Shin 2020). One concurrent working paper examines the relationship between religion and disclosure readability (
Cano-Rodríguez and Moreno 2020), but it measures religiosity using a less-accurate, location-based proxy. Hence, to the best of our knowledge, our research is the first to employ an individual-based measure of top management religiosity to study how the religiosity of firm decision-makers affects the readability of firm disclosures.
Within the realms of the individual religiosity literature in accounting and finance, our paper is one of the first studies to utilize publicly available data from BoardEx to identify the religiosity and the religious denominations of executives through their membership in religious organizations. This approach of identifying both the religiosity and the religious denominations of executives is likely to be more comprehensive and direct compared to
Cai et al. (
2019) and
Chen et al. (
2022). These two studies identify executive faith and religiosity through the religious affiliations of an executive’s undergraduate or graduate degree issuing university. Such an approach could cause a mismatch where the religious denomination and/or religiosity of an executive does not match the religious denomination and/or religiosity of their undergraduate or graduate university. A religious executive who publicly discloses his/her religiosity, may not have attended a religious university, and therefore may not be accurately classified as per
Cai et al. (
2019) and
Chen et al. (
2022)’s approach. Additionally, our study expands the range of publicly available datasets on individual religiosity that can be utilized by future researchers. It provides a credible alternative to the “Marquis Who’s Who” magazine data that
Baxamusa and Jalal (
2016) utilize for gathering their data on individual religiosity. Overall, introducing and utilizing the benefits of a unique subsection of BoardEx data that contains publicly available information on the individual religiosity of C-suite executives, form another core motivation for this study.
Our study’s findings suggest that the individual religiosity of the firm’s top-level managers has important and positive implications for a firm’s disclosure quality, as measured by the readability of those firms’ annual reports. In subsample analyses, CEOs appear to be the drivers of this positive relationship between religiosity and readability compared to the other non-CEO executives. This finding is consistent with CEOs being at the center of firm-communication channels such as disclosure and annual report preparation-related decisions (
Sherin 2010;
Lee et al. 2012;
Ke et al. 2019). Our main findings hold through multiple robustness tests using alternate samples matched on propensity scores and entropy-balancing firm and annual report characteristic-related controls. Additional subsample analysis also offers mixed evidence that executives with disclosed/identifiable religiosity from both Christian and non-Christian denominations significantly influence the readability levels of annual reports and the overall disclosure practices of firms. This finding is another novel contribution of our study as prior literature argues that the religion of the majority within a county in which a firm is located drives any positive associations between the overall religiosity of a county and the quality of accounting, financial reporting, or other business practices (
Grullon et al. 2009;
Dyreng et al. 2012;
McGuire et al. 2012;
Du et al. 2015;
Leventis et al. 2018;
Omer et al. 2018). Overall, our results help extend the scope of both the broader religiosity literature and the broader disclosure literature involving readability.
2. Hypothesis
The existing psychology and theological literature argue that two distinct viewpoints explain how humans use their religious identities when making decisions—the intrinsic dimension point of view and the extrinsic dimension perspective (
Salsman et al. 2005;
Vitell et al. 2009). Arguments from both these viewpoints affect how humans communicate information to one another. Firm financial disclosure is a common way corporate executives communicate with firm stakeholders. Thus, these different viewpoints provide a framework to predict how the religiosity of these executives affects corporate communication through disclosure.
The intrinsic dimension viewpoint of religiosity argues that humans rely on time-invariant forms of ascetic morality and do not increase or reduce their religiousness based on extrinsic needs (
Middleton and Putney 1962;
Salsman et al. 2005;
Hardy 2006;
Vitell et al. 2009). Furthermore, this perspective argues that religious individuals are highly morally conscious of the value implications of their actions to the overall society (
Geyer and Baumeister 2005;
Salsman et al. 2005;
Vitell et al. 2009). Hence, based on the intrinsic dimension viewpoint, religious individuals try to avoid as much uncertainty and be as transparent as possible in their actions, as such choices maximize the overall value-related implications of their actions for the entire community to which they belong (
Roccas 2005). This high moral consciousness and desire to be transparent for the common good is primarily driven by the sacredness with which religious individuals value the core of their belief systems (
Johnson 1959). Philosophically, this would be similar to honorable merchants in ancient societies, who were viewed as highly rational individuals who were dedicated and committed to their responsibilities and duty of care in long-term business relationships (
Milkau 2017;
Bott and Milkau 2018). Thus, proponents of this intrinsic dimension-oriented viewpoint of theology and psychology argue that religious individuals generally do not try to mislead their community.
The intrinsic dimension perspective suggests that more religious individuals in executive positions will create financial disclosures that are not purposefully misleading to financial statement users. Annual reports contain mandatory and voluntary disclosures that help explain a firm’s performance and business practices beyond what is provided in summary financial statements (
Loughran and McDonald 2011,
2014,
2016). Purposefully distorting this disclosed information has negative value implications for a firm’s stakeholders (
Gibbins et al. 1990). The opportunistic manipulation of information in annual reports would be similar to a purposeful distortion of the character and sanctity of religious fundamentals and core belief systems under the intrinsic dimension viewpoint (
Johnson 1959;
Pargament et al. 2005). Hence, given the arguments set forth by the proponents of the intrinsic dimension viewpoint, the religiosity of a firm’s C-suite executives is likely to be associated with increased annual report readability.
1Conversely, the extrinsic dimension viewpoint of psychology and theology suggests that increased religiosity may be used to reduce transparency in financial reporting. This perspective advocates that humans increase or reduce their religiousness based on extrinsic needs (
Salsman et al. 2005;
Vitell et al. 2009). In other words, individuals use their religious identity opportunistically depending on the situation or context they are in. Differences in religious interpretations that exist between sects or religious scholars within a particular religious subgroup (
Adhikari and Agrawal 2016;
Baxamusa and Jalal 2016;
Bhatti 2019), may amplify this religious identity-related opportunism and encourage individuals to undertake more risks (
Salsman et al. 2005;
Vitell et al. 2009).
Rawwas et al. (
2006) and
Li (
2008) provide evidence of religious identity-induced opportunism within the business literature by documenting that religious identity may be strategically marketed to fit one’s personal or business-related objectives and needs. Hence, managers may use their religiosity as a form of window-dressing or cheap talk (
Lyons and Mehta 1997;
Chen et al. 2016b;
Lizińska and Czapiewski 2019) to hide subpar business performance. These actions are similar to how superstar CEOs with media limelight use their media coverage as an attention-diverting tool (
Malmendier and Tate 2009). In other words, executives may masquerade their religiosity to cover for their deliberate and opportunistic opacity in firm disclosures (
Rawwas et al. 2006;
Li 2008).
Overall, the combined implications from both the intrinsic and extrinsic dimension perspectives suggest that religiosity at the top level of an organization could influence the degree of transparency of firm-level communications, such as in annual reports. Although the direction of this influence could be positive or negative, it can have important implications for observable measures of transparency such as readability. These arguments lead to our hypothesis.
H1. Religiosity at the top influences a firm’s annual report readability.