Firms Headquartered in Religiously-Adherent Counties Have Higher Credit Ratings, Lower Debt Costs

Newswise — A new study from the Tippie College of Business finds firms headquartered in more religiously observant counties have higher credit ratings and lower debt costs, evidence that suggests lenders and bondholders consider the company’s culture when deciding whether to give them money.

The study also finds that when lenders have little information about a firm’s finances, the religiosity information becomes more important.

The study joins a body of recent research that’s found firms located in more religious counties tend to take less risk and are less likely to engage in inappropriate behaviors, such as managing earnings or paying excessive executive compensation. Such effects can result from sincere religious belief or simply because managers are influenced by the culture in which they live and work, the UI researchers say.

“Religiosity can be viewed as a kind of ‘soft information,’” says Yiming Qian, associate professor of finance and study co-author. “Specifically, it’s soft information about the norms and values shared by a firm’s employees, managers in particular, and other stakeholders that can influence the firm’s commitment to debt obligation.”

For their study, Qian and her co-author, C. Wei Li, also a Tippie associate professor of finance, used data gathered by the American Religion Data Archive to determine the religious adherence of residents at the county level between 1986 and 2011. They then looked at the credit ratings, bond issues, and bank loans of thousands of public and private firms headquartered in those counties during that time.

The researchers found that firms located in highly religious counties tend to have much better ratings than those in less religious counties, which can result in significant savings in debt costs. Of the firms in the credit-rating study group, 51 percent in the top quartile—the most religious—earned investment-grade ratings from rating agencies. Only 38 percent in the bottom quartile, or the least religious, were rated investment grade. Moving from the bottom group to the top increases the probability of receiving an investment-grade credit rating by 5.6 percent.

The study also found that the more religious firms pay lower interest rates when borrowing from banks or issuing bonds.

The effect of religiosity on credit rating and debt costs is magnified even further for firms that have less information available, such as smaller firms that are not members of S&P 500, or are followed by fewer analysts. The researchers suggest that religiosity is more useful to determine a firm’s risk and ability to repay when little additional hard information is available or when trustworthiness is more valued.  

Qian’s and Li’s paper, Earthly Reward to the Religious: Religiosity and the Costs of Public and Private Debt, was co-authored by Feng Jian of the SUNY University at Buffalo and Kose John of New York University and Temple University. It will be published in a forthcoming issue of the Journal of Financial and Quantitative Analysis.