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Using an international sample of banks and country-level measures for several dimensions of religion, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior we predict less earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income increasing earnings management for loss avoidance and just-meeting-or-beating prior year’s earnings. We also find that religiosity is negatively related to income-smoothing behavior of banks. One interpretation of this finding is that banks in more religious societies have less volatile earnings perhaps because they engage in less risk taking and, therefore, have less need for income-smoothing.
Kiridaran Kanagaretnam, McMaster University
Gerald Lobo, University of Houston-Houston
Chong Wang, University of Kentucky