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Does religiosity enhance the quality of management earnings forecasts?
Author(s) -
Chourou Lamia,
He Luo,
Zhong Ligang
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12446
Subject(s) - religiosity , earnings , earnings management , earnings quality , pessimism , business , stock price , stock (firearms) , quality (philosophy) , risk aversion (psychology) , accounting , economics , monetary economics , demographic economics , financial economics , accrual , psychology , expected utility hypothesis , mechanical engineering , social psychology , paleontology , philosophy , epistemology , series (stratigraphy) , engineering , biology
This study investigates whether firms located in areas with higher levels of religiosity disclose higher‐quality management earnings forecasts than do other firms. Using a US sample of 4,655 firm‐year observations over the period 2001 to 2014, we find that firms headquartered in counties with higher proportions of religious adherents issue earnings forecasts that are less optimistically biased and that the effect of religiosity is concentrated in firms with weak monitoring mechanisms. We also find that religiosity mitigates pessimistic bias in management earnings forecasts, but only for those issued by firms operating in low litigation industries. This result suggests that when the litigation risk is high, both ethicality and risk aversion are at work and their competing effects likely offset each other. Additionally, we document that forecasts issued by firms in more religious areas trigger stronger stock price reactions than those issued by other firms and that the effect is limited to forecasts containing optimistic bias. Overall, our results show that religiosity enhances the quality of management earnings forecasts, but the effect varies based on different conditions.