Religiosity and corporate financial reporting: evidence from a European country

Abstract

Using a sample of Portuguese privately-held firms, I examine the association between religiosity and financial reporting quality. The results suggest that firms headquartered in Portuguese areas with strong religious adherence and in the core area of the Portuguese religious cult (the district where the Fátima Sanctuary is located) generally experience lower incidence of earnings management. I provide further evidence that the results are robust to alternative measures of religiosity, and that are not driven by firms headquartered in rural areas. I also conclude that religious social norms, together with other forms of external financial monitoring, represent a mechanism for reducing costly agency conflicts. While the religious practice declined in the last decades in Portugal, I provide evidence that, even in a such context, religiosity is associated with reduced acceptance of unethical business practices, in particular, with reduced acceptance of aggressive accounting practices.