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Does Religion Shape Corporate Cost Behavior?

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Abstract

Using U.S. listed firms during the period from 1971 to 2010, this paper investigates the effect of religion on corporate cost behavior. We find that religion mitigates cost stickiness induced by agency or behavioral biases of managers. This result holds for several robustness tests that address endogeneity concerns. The mitigating effect of religion on cost stickiness is through the channel of reducing top managers’ overconfidence and optimistic bias regarding future demand change (risk-aversion mechanism) and promoting managers’ adherence to fiduciary responsibilities and consideration of shareholder benefits (ethic mechanism). Further evidence shows that the reduction in cost stickiness caused by religion increases firm value. Overall, our findings suggest that religion reduces the wedge between a firm’s actual and optimal resource commitments, which helps to improve firm value and resource allocation efficiency.

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Notes

  1. A CEO that makes business decisions often works at corporate headquarter. So it is highly possible that a CEO is influenced by the religious atmosphere of the firm’s headquarter area. That is why we focus on the religiosity of a firm’s headquarter county. The same approach can be seen in Coval and Moskowitz (1999), Ivković and Weisbenner (2005), Loughran and Schultz (2004), Pirinsky and Wang (2006), and so on.

  2. As pointed out by Banker et al. (2013), the cut-offs of 50 and − 33% are symmetric when transformed into the log-change form (ln(3/2) and ln(2/3), respectively).

  3. The two variables, SG&A and SALE, are measured in millions of dollars in Table 2.

  4. Data on county-level demographic characteristics are gotten from the website of U.S. Census Bureau and U.S. Bureau of Economic Analysis. Data on population age, sex ratio, and educational attainment are available for only several survey years. We linearly interpolate the data to obtain the values in the missing years.

  5. We do not analyze the other denominations given their small demographic presence.

  6. Because this standard deviation is computed separately for each firm, it captures variation in sales over time, but not variation across firms.

  7. A firm overly invests if its actual new investment is higher than the expected investment. Following Richardson (2006), we estimate the expected investment according to the following regression specification: \({\text{Investment}}_{t} = \alpha_{0 } + \, \alpha_{1} \times V/P_{t - 1} + \, \alpha_{2} \times {\text{Leverage}}_{t - 1} + \, \alpha_{3} \times {\text{Cash}}_{t - 1} + \, \alpha_{4} \times {\text{Age}}_{t - 1} + \, \alpha_{5} \times {\text{Size}}_{t - 1} + \alpha_{6} \times {\text{Stock Returns}}_{t - 1} + \, \alpha_{7} \times {\text{Investment}}_{t - 1} + {\text{ Year fixed effects }} + {\text{ Industry fixed effects }} + \, \varepsilon_{t},\), where all of the variables are defined in the same way as Richardson (2006).

  8. We multiply the initial firm-level cost stickiness measure of Weiss (2010) by − 1, in order that a larger value of CS can suggest a greater level of cost stickiness.

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Funding

Funding

The authors acknowledge financial support from the National Natural Science Foundation of China (Grant Nos. 71802048, 71872175, 71790604, and 71790591) and the Fundamental Research Funds for the Central Universities “The Belt and Road” research database construction project of UIBE (Grant No. TS4-08).

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Authors and Affiliations

  1. Business School, University of International Business and Economics, No. 10 Huixin East Street, Chaoyang District, Beijing, China

    Lijun Ma

  2. Renmin Business School, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing, China

    Xin Wang

  3. PBC School of Finance, Tsinghua University, No. 43 Chengfu Road, Haidian District, Beijing, China

    Che Zhang

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  1. Lijun Ma
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Appendix

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See Table 13.

Table 13 Variable definition
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Ma, L., Wang, X. & Zhang, C. Does Religion Shape Corporate Cost Behavior?. J Bus Ethics 170, 835–855 (2021). https://doi.org/10.1007/s10551-019-04377-4

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