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Their findings seem to suggest that companies that are headquartered in religious areas are less likely to see their stock price crash.
The rationale is pretty straightforward. Religiosity and strong corporate governance are thought to go hand-in-hand. The researchers cite studies that tie religiosity to lower accounting risk and fewer instances of option backdating.
The also note that religiosity is positively related to risk aversion.
Here’s the study’s abstract:
This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion, as a set of social norms, helps to curb bad news hoarding activities by managers. Our evidence further shows that religiosity is more salient in curbing bad news hoarding for riskier firms and firms with weak governance mechanisms. Specifically, we find that the negative relation between religiosity and stock price crash risk is stronger (more negative) for riskier firms and for firms with weaker corporate governance monitoring mechanisms as measured by shareholder takeover rights and dedicated institutional ownership.
The religiosity of a county was measured using data from the American Religion Data Archive, which includes “county-level data on the number of churches and the number of total adherents by religious affiliation.”
Here’s how the researchers measured crash risk. It’s a bit wonky.
Following prior literature (Chen et al., 2001; Jin and Myers, 2006; Hutton et al., 2009), we employ three firm-specific measures of stock price crash risk for each firm-year observation: 1) the negative coefficient of skewness of firm-specific daily returns (NCSKEW); 2) the down-to-up volatility of firm-specific daily returns (DUVOL); 3) the difference between the number of days with negative extreme firm-specific daily returns and the number of days with positive extreme firm-specific daily returns (COUNT).
Take it for what it’s worth.
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