ARTICLE IN PRESS

Journal of Financial Economics 93 (2009) 455–473

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Journal of Financial Economics

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Does religion matter in corporate decision making in America?$

Gilles Hilary a, Kai Wai Hui b,
a
HEC Paris, 1, rue de la Libération, 78351 Jouy en Josas cedex, France
b
Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

a r t i c l e in fo abstract

Article history: We examine how corporate culture influences firm behavior. Prior research suggests a
Received 6 August 2007 link between individual religiosity and risk aversion. We find that this relationship also
Received in revised form influences organizational behavior. Firms located in counties with higher levels of
25 June 2008
religiosity display lower degrees of risk exposure, as measured by variances in equity
Accepted 12 October 2008
returns or returns on assets. They exhibit a lower investment rate and less growth, but
Available online 13 May 2009
generate a more positive market reaction, when they announce new investments.
JEL classification: Finally, chief executive officers are more likely to join a firm with a similar religious
G31 environment as in their previous firm when they switch employers.
G32
& 2009 Elsevier B.V. All rights reserved.
Z12

Keywords:
Corporate investment
Risk aversion
Corporate culture
Religion

1. Introduction to enhance economics at several levels: generating

The role of corporate culture in decision making has
not been widely studied in the economics literature. Yet, it
seems intuitive that firms operating in different social
environments would exhibit different behaviors. In actu-
ality, firms do not make decisions, people do and what
they do outside work is likely to affect the ways they make
these decisions inside work. This study focuses on a
specific example of social interactions and examines the
influence of community religion on corporate decisions.
This setting gives us an opportunity to operationalize the
concept of corporate culture empirically. In addition, as
noted by Iannaccone (1998), ‘‘studies of religion promise
$
We thank In Choi, Steve Matsunaga, Jeff Pittman, John Shon, and
Robert Wyer, as well as the workshop participants at HKUST, HEC
Lausanne, Imperial College, Korea University, the University of Alberta,
and the University of Paris-Dauphine, for their helpful comments.
 Corresponding author.
E-mail address: ackw@ust.hk (K.W. Hui).
information about a neglected area of ‘‘nonmarket’’
behavior; showing how economic models can be modified
to address questions about belief, norms and values; and
exploring how religion (and, by extension, morals and
culture) affects economic attitudes and activities of
individuals, groups and societies’’.
In fact, religion has long been part of economic
thought. For example, Smith (1776) suggests that partici-
pation in religion could be viewed as a rational action by
which individuals enhanced the value of their human
capital (Anderson, 1988). Later, Weber (1905) suggests
that the Protestant ethic was at the core of the economic
development of capitalism. Modern economic theory has
revisited the analysis of religions. At the microeconomic
level, religion has been linked to a large range of social
decisions (see Iannaccone, 1998). This literature is now
reasonably well developed and typically uses micro-level
data to support empirical analysis. However, it says little
about corporate decision making. A second, more recent
stream of the literature has focused on religion and

0304-405X/$ - see front matter & 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.jfineco.2008.10.001
 ARTICLE IN PRESS
456 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
macroeconomic growth. For example, Barro and McCleary
(2003) find that macroeconomic development has a
negative correlation with church attendance. Although
this research provides valuable insights, the heterogeneity
of the samples increased the risk of omitted variables.
For example, religion, legal environment, and economic
structure are likely to be correlated in cross-country
samples in ways that are difficult to disentangle (e.g.,
Zucker and Darby, 1999). Our study also considers the link
between religion and economic development but focuses
on one country. In doing so, we examine a sample that is
very consistent in terms of financial development, legal
structure, public infrastructure, and productivity.
Specifically, we consider the effect of religious partici-
pation at the county level in the US on corporate decisions
made by firms located in this county. Prior research has
suggested a positive correlation between an individual’s
risk aversion and religiosity. For example, Miller and
Hoffmann (1995) report a negative correlation at the
individual level between religiosity and attitudes towards
risk and danger. Similarly, Osoba (2003) uses individual-
level panel data from the Panel Study of Income Dynamics
(PSID) to show that risk-averse individuals attend church
more often than risk-seeking individuals. The results of an
additional experiment that we conducted indicate that
individuals who attend religious services more often or
who are primed with religious texts are less likely to
accept riskier payouts. We use these findings to investi-
gate whether the relation between individual risk aver-
sion and religiosity influences organizational behavior.
Our archival results suggest that this is indeed the case.
We find that firms located in US counties with high levels
of religiosity tend to exhibit lower risk exposure as
measured by the variances in returns on assets (ROA) or
in equity returns. When we decompose the total equity
risk, we find that both the systematic and idiosyncratic
components are lower for these firms. As a result of this
risk aversion, the firms in these counties require a high
internal rate of return before investing, which translates
to higher undiscounted profits and to lower rates of
investment (both tangible and intangible). Not surpris-
ingly, given this lower investment rate, their long-term
growth (both expected and realized) is also lower. Our
results are both statistically and economically significant.
They hold in univariate tests as well as in multivariate
ordinary least squares (OLS) and two-stage least squares
(2SLS) specifications. They hold when we control for a
large number of social and economic variables, both
specific to firms and counties. They also hold in many
different subsamples based on geography, industry com-
position, and time periods. Our results are largely cross-
sectional in nature, but they also hold in either panel or
pure time-series specifications. In particular, we find that
the religious environment Granger-causes the different
aspects of the firm behavior we discuss above. These
different tests minimize the risk that our results are
driven by omitted variables. When we consider individual
religious groups, we find that the effect is most consistent
in counties where there is a large proportion of Protes-
tants but Catholics also usually have a significant effect.
The fact that both groups have a significant effect in spite
of being strongly negatively correlated with each other
suggests that our main results are not caused by an
omitted variable correlated with religiosity. In addition,
we find that investors react more positively to investing
and financing decisions that are made by firms located in
a more religious county. This result is consistent with the
notion that such firms have a higher subjective discount
rate and act only when the undiscounted cash-flows
associated with their decisions are very high. Finally, we
consider a sample of chief executive officers (CEOs) who
moved from one firm to another. We find that the degree
of religiosity in the county where their former employer is
located predicts the degree of the county religiosity of
their new employer. This suggests that corporate culture
affects the distribution of CEOs across firms.
We contribute to the literature by studying the effect of
corporate culture on economic behavior and, particularly,
on investment. Although the influence of corporate
culture is frequently discussed in the popular press, we
are aware of little empirical work on this topic in the
economics literature, perhaps because of the difficulty of
operationalizing this concept. We focus on religion as a
significant sociological factor in part because extensive
psychological theory provides a directional prediction on
the religious effect. Our empirical results are consistent
with our theoretical predictions and can be related to
prior findings that relate macroeconomic growth with
religious activity. Although the effect of religion on
individuals and countries has been analyzed, we are
aware of little research on its effects on organizations. We
also expect that numerous other noneconomic factors also
affect corporate behavior and have economic implications.
For example, firms operating in an environment with a
high level of inter-personal trust may behave in a different
way than do firms operating in a highly litigious society.
The rest of this paper proceeds as follows. Section 2
reviews the previous literature and develops our hypoth-
eses. Section 3 describes the sample and data sources.
Section 4 presents the main empirical setting and results.
Section 5 offers some additional empirical analyses. We
conclude in Section 6.
2. Prior literature and hypothesis development
2.1. Economics and religion
The economic analysis of religion can be broadly
categorized into the micro- and the macro-level. At the
microeconomic level, previous research has focused on
the decisions of individuals and their religious affiliations
on marriage (e.g., Lehrer and Chiswick, 1993), divorce
(e.g., Heaton and Pratt, 1990), crime participation (e.g.,
Evans, Cullen, Dunaway, and Burton, 1995), suicide
(e.g., Bainbridge, 1989), drug and alcohol consumption
(e.g., Cochran and Akers, 1989), or extra-marital sex (e.g.,
Thornton, Axinn, and Hill, 1992). At the macroeconomic
level, a literature has emerged that seeks to understand
the link between economic growth and religion. This
literature can perhaps be traced back to Smith. Anderson
(1988), in his analysis of the Wealth of Nations, indicates
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
that Smith attempted to show how the self-interest of the
clergy and political leaders interacted with economic
growth and development. Weber (1905) related the
development of capitalism to Protestantism and was
perhaps the first to relate religion with risk taking. More
recently, La Porta, Lopez-de-Silanes, Shleifer, and Vishny
(1999) use religion as a proxy for culture in their study of
government quality across countries. Stulz and Williamson
(2003) find that a country’s principal religion helps to
predict the cross-sectional variation in creditor rights
better than does a country’s openness to international
trade, its language, its income per capita, or the origin
of its legal system. They also find that religion is an
important predictor of how countries enforce rights. Barro
and McCleary (2003) find that macroeconomic develop-
ment has a negative correlation with church attendance
across countries (but a positive one with beliefs in heaven
and hell). They report that economic growth responds
positively to the extent of religious beliefs, notably beliefs
in hell and heaven, but negatively to church attendance.
Guiso, Sapienza, and Zingales (2003) find that, across
countries, religious beliefs are associated with ‘‘good’’
economic attitudes, where good is defined as conducive to
higher per capita income and growth.
Although this research provides valuable insights, it is
generally conducted using cross-sectional samples at the
country level. This approach increases the risk of omitted
variables. In other words, researchers face too many
variables and do not have enough degrees of freedom in
such samples to conduct powerful tests (e.g., Zucker and
Darby, 1999). This also makes it more difficult to under-
stand the exact mechanisms that link religion to economic
decisions. Although some institutional settings can be
traced back to theological considerations (e.g., usury
laws), the complexity of religions and the multiplicity
of religious doctrines make it difficult to link specific
religious theories with actual behavior. For example,
Weber was subsequently accused of ‘‘mischaracterizing
Protestant theology, misinterpreting Catholicism, ignoring
nonreligious sources of intellectual ferment’’ (Noland,
2003) in his analysis.
2.2. Previous evidence on religiosity and risk at the
individual level
Therefore, instead of trying to ground our analysis on
religious doctrine or institutions, we turn to the psycho-
logy and anthropology literatures. Prior research has
shown a positive correlation between risk aversion and
individual religiosity. For example, Miller and Hoffmann
(1995) use data collected by Bachman, Johnston, and
O’Malley (1993) at the University of Michigan’s Survey
Research Center for a nationally representative sample of
American high school seniors. They report a negative
correlation between religiosity (measured by church
attendance and a subjective rating of religion’s impor-
tance in one’s life) and self-reported attitudes towards risk
and danger. Osoba (2003) uses individual-level panel
regressions to show that risk-averse individuals attend
church more often than risk-seeking individuals. Specifi-
457
cally, he regresses a self-reported measure of church
attendance with a panel study of income dynamics (PSID)
risk-avoidance indicator and various control variables. The
risk-avoidance indicator is based on multiple individual
decisions, such as whether an individual fastens his or her
seat belt, is covered by medical or car insurance, smokes,
or maintains a financial cushion. Osoba (2003) reports
that risk avoidance and church attendance are consis-
tently positively correlated at the 1% level. Similarly, Diaz
(2000) indicates that Las Vegas residents who attend
religious services gamble less frequently and for lower
amounts than those who attend services less regularly. He
finds a similar negative relation between the self-reported
level of importance of religion and the frequency of
gambling. Using survey data on insurance purchase, Halek
and Eisenhauer (2001) report a positive but weakly
significant correlation between religion and risk aversion.1
Dehejia, DeLeire, and Luttmer (2005) report individual
data suggesting that religious participants have less
volatile income streams.2
We also downloaded the European Social Survey data
maintained by the Norwegian Social Science Data Services
and examined the correlation between several variables.3
We first use the frequency of religious services attendance
as a measure of religiosity, and then consider several
questions associated with risk aversion (the importance of
living in safe and secure surroundings, the importance of
the government being strong and ensuring safety, the
importance of thinking about new ideas and being
creative, and the importance of trying new and different
things in life).4 The correlations between the measure of
religiosity and the four other variables are 0.13, 0.12,
0.07, and 0.05. All of the correlations are significant,
with p-values equal to 0.00, which is consistent with the
idea that individuals who attend religious services more
frequently are also more risk averse.
2.3. Additional experimental results on the relation between
religiosity and risk at the individual level
To further understand the relation between religiosity
and risk aversion, we conducted an experiment. We
distributed questionnaires to 120 undergraduate business
students, and asked them to read a text of approximately
400 words. There were two possible versions of this text
1
Note that 95% of the observations in Halek and Eisenhauer (2001)
are classified as belonging to religious groups and that a variable for each
of the different groups (Protestant, Catholic, and Jewish) is included. This
specification is therefore more suitable for detecting differences across
the different groups rather than investigating whether religion as a
whole has an effect. Also, dummy variables are used to measure religious
participation and no attempt is made to distinguish between the levels
of religious activity. These issues may explain why the coefficients are
positive but only weakly significant.
2
These results are also broadly consistent with studies that find a
negative correlation between religiosity and various types of risk-taking
behavior (e.g., crime, alcohol consumption, unsafe sex, or gambling),
although admittedly these types of behaviors can also be influenced by
moral dimensions and religious proscriptions.
3
http://ess.nsd.uib.no/.
4
We used the questions named rlgatnd, impsafe, Ipstrgv, Ipcrtiv, and
Impdiff.
 ARTICLE IN PRESS
458 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
that were randomly allocated between participants. The
first version was about religious architecture in the
European Middle Ages, and contained numerous refer-
ences to churches and other religious matters. The second
text was about the American architect Frank Lloyd Wright,
and contained no references to religious issues. We
offered two hypothetical wagers (the first one gave the
choice between receiving 100 with certainty, or receiving
400 with a probability of 0.5, or zero with a probability of
0.5, and the second gave the choice between receiving 100
with certainty, or receiving 800 with a probability of 0.33,
or zero with a probability of 0.66). We also asked the
participants the frequency with which they attended
religious services.
We then estimated two probit regressions, the depen-
dent variables in which were the choice between the risky
and safe options in both wagers. We used two treatment
variables in each regression (the frequency of attendance
at religious services and whether the participants read the
text with religious references or the text without religious
references). We also controlled for the degree of social
conservatism, a measure of optimism, and the age and the
gender of the participants (the group was homogenous
in terms of marital status and number of children). The
untabulated results indicate that the frequency of atten-
dance at religious services was negatively correlated
with the likelihood of accepting the risky payout (with a
p-value of 0.03 in both cases). The participants who were
randomly assigned the text with religious references were
also less likely to accept the risky payout (the p-values
equaled 0.20 and 0.08 and dropped to 0.12 and 0.08 when
we allowed for nonlinearities in religious attendance).
2.4. Theoretical explanation for the relation between
religiosity and risk at the individual level
All of these experimental and archival results support
the existence of a positive relation between risk aversion
and religiosity at the individual level. However, develop-
ing a theory for this relation is more challenging than
establishing its existence. A possible explanation for the
correlation is that anxiety mediates the relation between
religiosity and risk aversion.5 For example, Miller and
Hoffmann (1995) and Miller (2000) note that many classic
studies of religion (e.g., those of Malinowski, 1925;
Homans, 1941) emphasize the link between religion and
the fear of uncertainty. These classic studies suggest
that religion is sought by risk-averse individuals who are
trying to reduce the subjective amount of anxiety about
risk and uncertainty in their lives. Consistent with this
theory, Rokeach (1968) reports empirical evidence that
indicates that religious people tend to be more anxious.
Ahmad (1973) also finds experimental evidence that
confirms this view. More recent data from the World
Values Survey6 further confirm these older results,
5
Note, however, that the focus of our study is to establish a link
between county religiosity and corporate behavior, not to explain the
existence of a correlation between religiosity and risk aversion at the
individual level.
6
http://www.worldvaluessurvey.com/.
demonstrating a significantly positive correlation be-
tween attendance at religious services and anxiety among
US Protestants and Catholics.7 In turn, other previous
studies suggest that anxiety leads people to more risk-
averse behavior. The experimental results presented in
Gasper and Clore (1998), Lerner and Keltner (2000),
and Lerner and Keltner (2001), for example, are consistent
with this prediction.
2.5. Individual characteristics and organizational behavior
The characteristics of individuals are likely to affect
group behavior. For example, Halek and Eisenhauer (2001)
suggest that ‘‘as Geis (1993, p. 12) explains, ‘According to
social identity theory (Hogg and Abrams 1988; Tajfel,
1981) much of one’s personal identity is derived from
social group membership as one’s nationality, ethnicity,
religion and occupation—as well as from one’s sex. We
adopt and internalize the norms, values and attributes
of our groups’. Thus, for example, adherents of religions
that proscribe gambling are less likely than others to
engage in wagering as they attempt to conform to the
group’s expectations’’.
This tendency to conform to the dominant values and
behavior of the group has implications for firm behavior.
For example, the link between individual and organiza-
tional characteristics has been studied in the personnel
psychology literature. Schneider (1987) suggests that
‘‘attraction to an organization, selection by it, and attrition
from it yield particular kinds of persons in an organiza-
tion. These people determine organizational behavior’’.
Schneider, Goldstein, and Smith (1995) review subsequent
empirical evidence confirming the basic premises of this
theory. This approach is built on earlier work. For
example, Vroom (1966) shows that people choose to work
in organizations that they believe will be most instru-
mental in helping them to obtain their valued outcomes.
Tom (1971) shows that people prefer environments that
have the ‘‘same’’ personality profile as they do. Holland
(1976) reports that the career environments people
choose tend to be similar to the people who choose them.
This line of research suggests that organizations should be
fairly socially homogeneous. Consistent with this view,
Alesina and La Ferrara (2000) find evidence that partici-
pation in social activities is lower in more unequal and
ethnically fragmented localities.
It would seem natural to expect that the culture of an
organization is generally aligned with the local environ-
ment of the firm. Managerial style, corporate culture,
employees’ preferences, and investment behavior should
all be congruent. To the extent that religious individuals
cluster in a county, firms located in this county should
7
We correlate two variables. The first, question F028, asks the
respondents how often they attend religious services. The responses
range from ‘‘more than once a week’’ to ‘‘never or practically never’’. The
second, question A021, asks the respondents ‘‘When you are at home, do
you feel anxious?’’ The responses range from 1 ‘‘Strongly agree’’ to 4
‘‘Strongly disagree’’. Among US respondents who are self-declared
Protestants or Catholics, the correlation is 0.04 and significant at the
two-tailed 10% level.
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
employ a larger proportion of religious people at different
levels of the organization. As a result, the extent to which
religious employees, managers in particular, tend to be
more risk averse should be reflected in a firm’s corporate
culture and its behavior. This should generate a greater
aggregate risk aversion for firms that are located in more
religious counties than for firms that are located in less
religious counties. In other words, the corporate culture in
these firms leads them to seek a lower risk exposure.
2.6. Empirical predictions
This hypothesis leads to different predictions about
corporate decision making that we test empirically. For
example, if firms have a more risk-averse corporate
culture, they should avoid projects with more uncertain
payoffs (i.e., they should generate more stable profits).
Therefore, we expect that the standard deviations of ROA
or stock returns for ‘‘religious firms’’ should be lower
compared with those of other firms. As a consequence of
risk aversion, these firms should also avoid projects whose
profitability is more uncertain and require a higher
internal rate of return before investing (i.e., their sub-
jective discount rate for risky cash-flows should be
higher). If this is the case, these firms will invest in
projects with higher undiscounted cash-flows compared
to those accepted by less risk-averse firms. Thus, the
‘‘religious firms’’ should experience a higher ROA (i.e.,
higher average undiscounted profits for a given level of
capital invested by the firm). They should also invest less
because this higher hurdle rate implies that fewer positive
net present value projects are available to them.8 This
prediction is consistent with the analytical work of
Malinvaud (1987) and the empirical findings of Sauner-
Leroy (2004) who both suggest that risk-averse firms
invest less. Therefore, we expect that the investment rate,
both in tangible assets and in research and development
activities should be lower for firms located in a religious
environment.9 As a consequence of these behaviors, we
also expect that the expected growth of these firms should
be lower. In other words, firms in religious areas should
use higher internal rates of returns to decide which
projects to take on. As a consequence, they accept only
projects that are reliably profitable (i.e., those with a low
payoff volatility). This implies that these firms should be
more profitable on average (i.e., a high ROA), but will
experience lower growth (i.e., low equity returns) than
firms in less religious counties.10
8
Suppose that a firm has two possible projects requiring an
investment of $100 in both cases. The first one will generate $200 in
the following period, the second project $150. If the firm invests in both
projects the ROA will be 1.5. If the firm invests only in the first project
because the second has a negative net present value due to a high
discount rate, the ROA will be 2.0.
9
An alternative explanation for our ROA prediction is that if firms
invest less, they will presumably choose the most productive projects
when they invest. Therefore, if risk-averse firms invest less, then their
returns on investment should be higher on average for a given
investment opportunity set.
10
For example, suppose two firms have the option of investing in a
project with an equal probability of gaining 2.0 or losing 0.5 and a
459
2.7. Theoretical summary
To summarize our theoretical developments, we first
relate risk aversion and religiosity at the individual level.
Based on the previous literature, we argue that more
religious individuals are more risk averse. We then explain
why firms surrounded by more risk-averse individuals are
likely to be more risk averse, and argue that firms located
in areas in which the population is more religious should
therefore be more risk averse. Finally, we develop specific
testable predictions that relate firm risk aversion to
various aspects of firm behavior. We argue that risk-
averse firms should have a lower profit volatility, a lower
investment rate, a greater profitability, and lower growth.
In the following sections, we explain how we test these
different hypotheses, and discuss our empirical results.
3. Sample, data sources, and descriptive statistics
3.1. Sample
To test our predictions, we focus our study on the
United States. This stands in contrast to previous work on
economic growth and religion, which typically considered
differences across countries at the macro-level. The main
advantage to focusing on one country is that we obtain a
more homogeneous sample in terms of financial and
economic development, legal structure, public infrastruc-
ture, and so forth. In addition, we add a time-series
component to our analysis, whereas prior research has
largely focused on cross-sectional approaches. Studying
the US is also advantageous because it has a higher level of
religious practice than other countries but with a similar
level of socio-economic development. For example,
Iannaccone (1998) reports that weekly church attendance
rates are four times higher in the US than in Scandinavian
countries. He also reports that the rates of church
membership in the US have increased throughout the
past two centuries. The US is overwhelmingly Christian,
primarily Protestant, but has a relatively heterogeneous
Christian population. This gives us a more favorable
setting to study religious diversity in comparison to many
countries that are dominated by a single denomination
(e.g., Catholics in Poland or Italy).
3.2. Data sources and main variables
Our data on religiosity and religious composition come
from the American Religion Data Archive (ARDA). We use
the ‘‘Churches and Church Membership’’ files. This data
set was initially collected by the Glenmary Research
Center. It contains statistics by county for 133 Judeo-
Christian church bodies, providing information on the
number of churches and the number of members of each
(footnote continued)
project with an equal probability of gaining 0.51 and losing 0.5. A risk-
neutral firm will invest in both projects; a sufficiently risk-averse firm
will pass on the second project. As a result, the average ROA will be
higher for the risk-averse firm.
 ARTICLE IN PRESS
460 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
church in every county. Our main variable of interest is
the degree of religiosity (REL) in the county where the firm
is located. We calculate REL as the number of religious
adherents in the county (as reported by ARDA)11 to the
total population in the county (as reported by the US
Census Bureau). Information on religiosity at the county
level is available for four years (1971, 1980, 1990, and
2000). In our main tests, we follow previous studies (e.g.,
Alesina and La Ferrara, 2000) and linearly interpolate the
data to obtain the values in the missing years (from 1972
to 1979, from 1981 to 1989, and from 1991 to 1999).
Approximating REL linearly increases the power of our
tests and gives us the opportunity to study the time-series
properties of our setting but, as discussed in the following,
the results also hold when we do not linearly interpolate
REL. Following the previous literature (e.g., Coval and
Moskowitz, 1999; Ivkovic and Weisbenner, 2005;
Loughran and Schultz, 2004; Pirinsky and Wang, 2006),
we define a firm’s location as the location of its head-
quarters. As noted by Pirinsky and Wang (2006), this
approach seems ‘‘reasonable given that corporate head-
quarters are close to corporate core business activities’’. We
then examine the effect of these variables on firm-specific
characteristics such as risk exposure, investment behavior,
and growth. We obtain the data on these characteristics
from Compustat and the Center for Research in Security
Prices (CRSP) database. As it is customary, we delete firms
from the financial sectors (a Standard Industrial Classifi-
cation [SIC] code between 60 and 69). We also control for
different county-level demographic characteristics using
data obtained from the US Census Bureau. We use the
Compustat Company Location Code to match our county
information with firm location. An issue with this
approach is that Compustat only reports the current state
and county of a firm’s headquarters and therefore this
introduces noise in the measurement of our variable.
The number of firms that relocate is generally small.
For example, Pirinsky and Wang (2006) find only 118
examples of relocation in a sample of more than 5,000
firms over 15 years. In addition, although the magnitude
of the measurement error might be correlated with some
of our dependent variables, it seems unlikely that this
would be the case for the direction of the measurement
error. Therefore, we do not expect our estimated coeffi-
cients to be systematically biased. Nevertheless, as
explained in Section 4, we allow for this potential problem
in our empirical analysis.
3.3. Descriptive statistics
Table 1 provides descriptive statistics on the level of
religiosity. In Panel A, we present overall statistics for the
percentage of people who belong to a church in each
county and the breakdown between the different religious
11
ARDA indicates that ‘‘for [the] purposes of this study, adherents
were defined as ‘all members, including full members, their children and
the estimated number of other regular participants who are not
considered as communicant, confirmed or full members, for example,
the ‘‘baptized’’, ‘‘those not confirmed’’, ‘‘those not eligible for commu-
nion’’’ and the like’’.
groups. The size of the standard deviations suggests a fair
amount of variation in our sample. The largest religious
group is Protestants, followed by Catholics. In Panel B, we
present geographical data by reporting the average value
of church attendance in different regions. Utah and parts
of the Midwest (e.g., North and South Dakota, Wisconsin,
and Minnesota) and Northeast (e.g., Massachusetts, Rhode
Island, and the District of Columbia) tend to be more
religious, whereas states in the West (e.g., Oregon,
Washington, and Alaska) tend to be less religious. To gain
a sense of the religious diversity at the county level, we
classify the different churches into five main groups
(Protestant, Catholic, Orthodox, other Christian such as
the Church of Latter Day Saints, and Jewish) using the
ARDA classification12 and then form an index similar to
the Herfindhal index. The average religious percentage on
the Herfindhal index is high (72%). This and the relatively
large number of counties with a value of one (5%) suggest
that religious composition is relatively homogenous at the
county level. In Panel C, we present the descriptive
statistics for our main variables. The mean and median
of REL are close to each other (53% and 51%), as shown in
Panel A. REL has a reasonably high level of variations (the
standard deviation is equal to 19%). Most of this variation
is cross-sectional in nature, but there is also a more
modest temporal component (the absolute change in
religiosity between the survey periods has a mean close to
3% and a standard deviation close to 8%). All of the means
and medians of the dependent variables are consistent
with our hypotheses. StdRet, StdRoa, Inv, RD, and Growth
are lower in the subsample of firms in the lower third of
REL values than in the upper third. The mean and median
ROA are both higher in the upper third than in the lower
third.13 The untabulated results indicate that the differ-
ences in means and medians are all significant with
p-values equal to 0.00.
Table 2 presents a correlation table. In Panel A, we
consider the different demographic characteristics of the
counties. We initially consider the six demographic
variables analyzed by Iannaccone (1998) as the possible
determinants of religious participation at the individual
level: education, sex, income, minority status, marital
status, and age. More specifically, we consider educational
attainment as defined by the percentage of people 25
years and above who have a Bachelor’s, postgraduate, or
professional degree (Edu), the male-to-female ratio (Male)
in the county, the average monetary income by state
12
http://www.thearda.com/RCMS/2000/Denoms/Denominations.html.
Details are provided in Appendix A of the referenced web site. This database
ignored nonJudeo-Christian denominations until 1990, but these groups are
demographically marginal in the US. The survey considered Muslims in
2000, but we do not include them for internal consistency.
13
The dependent variables are StdRet, which is the log of the
standard deviation of the daily return calculated on a yearly basis, and
StdRoa, which is the standard deviation of ROA from year t5 to t+5. ROA
is the ratio of Compustat item 18 to item 6 lagged by one year. Inv is the
investment rate in tangible capital (calculated as the ratio of Compustat
item 128 to item 8 lagged by one year). RD is a measure of research and
development activity (the ratio of Compustat item 46 to item 6 lagged by
one year). Growth is the log of the ratio of the market value of equity (as
reported in CRSP) to the book value of assets (Compustat item 6 plus
item 199 times item 25 minus items 60 and 74, scaled by item 6).
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473 461

Table 1
Descriptive statistics.
This table provides descriptive statistics using all of the available observations from 1971 to 2000. REL is the ratio of the number of religious adherents
in the county (as reported by ARDA) to the total population of the county (as reported by the US Census Bureau). The subsample labeled ‘‘Low REL’’
consists of firm-years in the lowest third of REL, and the subsample labeled ‘‘High REL’’ consists of firm-years in the top third of REL. StdRet is the log of the
standard deviation of the daily return calculated on a yearly basis. StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the ratio of
Compustat item 18 to item 6 lagged by one year. Inv is the investment rate in tangible capital (calculated as the ratio of Compustat item 128 to item 8
lagged by one year). RD is a measure of R&D activity (the ratio of Compustat item 46 to item 6 lagged by one year). Growth is the log of the ratio of the
market value of equity (as reported in CRSP) to the book value of assets (Compustat item 6 plus item 199 times item 25 minus items 60 and 74, scaled by
item 6). Size is the log of annual sales as reported by Compustat item 12, Liquidity is the ratio of the cash balance (items 14 and 18) divided by item 8
lagged by one year, Loss is a dummy variable that takes the value of one if ROA is negative, and zero otherwise, and Leverage is the leverage ratio
(Compustat item 9 plus item 34 divided by item 9 plus item 34 plus item 60).

Panel A: Demographic characteristics by county

Mean Median Std. dev.

REL 52.920% 51.033% 18.588%

Protestant 36.876% 35.482% 18.849%
Catholic 13.687% 8.871% 14.849%
Orthodox 0.095% 0.000% 0.601%
Other Christian 2.349% 0.589% 8.466%
Jewish 0.277% 0.000% 1.312%

Panel B: Statistics by state

States Average % of adherents/total population Number of adherents

Utah 74.57% 1,665,206

North Dakota 73.06% 469,210
South Dakota 67.81% 511,836
Massachusetts 63.44% 4,028,109
Rhode Island 63.28% 663,343
District of Columbia 62.59% 358,064
Minnesota 61.45% 3,023,205
Oklahoma 60.58% 2,090,331
Wisconsin 60.29% 3,233,863
New York 59.22% 11,200,000
Nebraska 58.66% 1,003,745
Louisiana 58.49% 2,613,978
Iowa 58.32% 1,706,709
New Mexico 58.01% 1,055,224
Pennsylvania 57.37% 7,045,508
Arkansas 57.04% 1,524,915
Connecticut 57.01% 1,941,455
New Jersey 56.31% 4,738,032
Texas 54.95% 11,500,000
Alabama 54.59% 2,427,703
Mississippi 54.51% 1,550,564
Illinois 54.29% 6,742,422
Kentucky 53.31% 2,154,845
Missouri 51.36% 2,873,800
Tennessee 50.75% 2,887,155
Kansas 49.24% 1,323,765
Idaho 48.45% 626,899
South Carolina 47.43% 1,902,877
New Hampshire 47.36% 585,240
Wyoming 46.67% 230,462
California 45.33% 15,400,000
North Carolina 45.11% 3,631,279
Montana 44.66% 402,878
Ohio 44.58% 5,060,988
Georgia 44.30% 3,626,668
Indiana 42.72% 2,597,880
Maryland 42.27% 2,239,029
Michigan 41.03% 4,077,619
Florida 40.95% 6,544,544
Virginia 40.86% 2,892,530
Delaware 40.13% 314,431
Arizona 39.69% 2,036,166
Vermont 39.12% 238,151
Colorado 39.11% 1,682,404
Maine 36.29% 462,732
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462 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473

Table 1 (continued )

Panel B: Statistics by state

States Average % of adherents/total population Number of adherents

Hawaii 36.16% 438,085

West Virginia 35.86% 648,488
Nevada 34.17% 682,828
Alaska 34.11% 213,842
Washington 32.70% 1,927,297
Oregon 31.16% 1,066,063

Panel C: Firm characteristics

Full sample Low REL High REL

Mean Median Std. dev. Mean Median Std. dev. Mean Median Std. dev.

REL 0.488 0.481 0.119 0.358 0.368 0.038 0.624 0.611 0.064
StdRet 3.517 3.519 0.637 3.447 3.429 0.609 3.571 3.578 0.651
StdRoa 0.243 0.052 0.852 0.249 0.062 0.806 0.229 0.046 0.841
ROA 0.040 0.032 0.322 0.053 0.028 0.335 0.034 0.034 0.318
Inv 0.425 0.218 0.666 0.474 0.239 0.718 0.397 0.211 0.623
RD 0.094 0.027 0.185 0.114 0.038 0.200 0.086 0.026 0.175
Growth 0.383 0.206 0.659 0.403 0.222 0.670 0.363 0.184 0.653
Size 4.065 4.005 2.249 3.739 3.641 2.165 4.183 4.159 2.181
Liquidity 0.047 0.251 2.693 0.124 0.246 2.890 0.002 0.275 2.649
Loss 0.052 0.000 0.223 0.068 0.000 0.251 0.047 0.000 0.211
Leverage 0.403 0.360 0.418 0.398 0.345 0.431 0.398 0.353 0.413

(Money), and the percentage of minorities (Minority) and
married people (Married) in the state, as well as the
median age of the population (Age).14 We also consider the
size of the population in the county (Totpop). REL is
significantly correlated with the different demographic
control variables except Male, but the correlations among
the demographic variables are reasonably low. The only
exception is that between Married and Age (0.77).
Therefore, we exclude Age in our main tests, although
the main results (untabulated) are unaffected when we
include this additional control variable.
In Panel B, we consider six firm-specific variables:
StdRet, ROA, Inv, RD, Growth, and StdRoa. The results
indicate that religiosity is negatively correlated with all of
the corporate characteristics considered except for profit-
ability (for which the correlation is positive): firms located
in more religious counties appear to take fewer risks, be
more profitable, invest less in tangible and intangible
assets, and have lower levels of expected growth. These
univariate results are consistent with our expectations.
In addition, our numerous dependent variables are not
highly correlated. The use of multiple, reasonably un-
14
We obtain education data by state for 1990 and extrapolate that
data based on national data for 1970, 1980, and 1990. We obtain data on
married households and minorities for 1970, 1980, and 1990 and obtain
data on income for every five years between 1965 and 1989. We obtain
data on the male-to-female ratio in 1990 and 2000 and on the median
age in 1980 and 2003. We linearly interpolate the data between these
years and also obtain data on cross-sectional variations at the county
level for Edu, Money, and Male in 2000 and for Minority in 1989. We then
use this structure to obtain county-specific values for these variables.
The results (untabulated) hold if we use the log of the variables rather
than the ratio.
correlated variables mitigates the risk that our results may
be due to an omitted variable in any given regression.
4. Empirical setting and results
4.1. Main specifications
We extend our analysis of the univariate correlations in
Table 2 by using regressions that control for multiple
variables. We first consider the influence of county
religiosity on the amount of risk taken by a firm and on
different related corporate aspects. Our model is
k
FLC i;t ¼ a1 þ b1 RELi;t þ d Demok;i;t þ gj Controlsj;i;t1
y
þ j Yearsy;t þ i;t , (1)
where FLC is a vector of the firm-level characteristics
defined in Section 3 (StdRet, ROA, Inv, RD, and Growth). We
expect b to be negative in all of the specifications, except
for when ROA is the dependent variable, in which case we
expect b to be positive. Demo is a vector of the county-
level demographic characteristics also previously defined
(Totpop, Edu, Male, Money, Minority, and Married). We
include these control variables because they have been
shown to be correlated with religious participation, and
we want to make sure that REL captures the effect of
religious participation per se, as opposed to simply being
correlated with the other demographic characteristics. We
do not have strong predictions concerning the effect of
these control variables (after controlling for REL), although
we expect that education, and perhaps wealth, will be
correlated with corporate behavior that is more conducive
to growth and investment. We expect that the presence of
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G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473 463

Table 2
Correlation tables.
This table reports the correlations among the variables using all of the available observations from 1971 to 2000. REL is the ratio of the number of
religious adherents in the county (as reported by ARDA) to the total population of the county (as reported by the US Census Bureau). The demographic
control variables are: the size of the population in the county (Totpop), educational attainment, defined as the percentage of people 25 years and over
having a bachelor’s, graduate, or professional degree (Edu), the male-to-female ratio (Male), the percentage of married people in the state (Married),
average state money income (Money), and the percentage of minorities (Minority) in the county. The dependent variables are as follows. StdRet is the log of
the standard deviation of the daily return calculated on a yearly basis. StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the ratio of
Compustat item 18 to item 6 lagged by one year. Inv is the investment rate in tangible capital (calculated as the ratio of Compustat item 128 to item 8
lagged by one year). RD is a measure of R&D activity (the ratio of Compustat item 46 to item 6 lagged by one year). Growth is the log of the ratio of the
market value of equity (as reported in CRSP) to the book value of assets (Compustat item 6 plus item 199 times item 25 minus items 60 and 74, scaled by
item 6). ***, **, and * indicate two-tailed significance at 1%, 5%, and 10%, respectively.

Panel A: Demographic characteristics (by county)

REL Totpop Edu Male Married Money Minority

Totpop 0.13*** 1.00

Edu 0.04*** 0.22*** 1.00
Male 0.00 0.13*** 0.17*** 1.00
Married 0.08*** 0.14*** 0.47*** 0.15*** 1.00
Money 0.10*** 0.15*** 0.17*** 0.11*** 0.15*** 1.00
Minority 0.09*** 0.38*** 0.10*** 0.03*** 0.03*** 0.01 1.00
Age 0.07*** 0.17*** 0.37*** 0.02*** 0.77*** 0.15*** 0.00

Panel B: Firm characteristics (by firm years)

REL StdRet StdRoa ROA Inv RD

StdRet 0.11*** 1.00

StdRoa 0.05*** 0.26*** 1.00
ROA 0.03*** 0.33*** 0.50*** 1.00
Inv 0.07*** 0.12*** 0.20*** 0.09*** 1.00
RD 0.07*** 0.24*** 0.42*** 0.54*** 0.31*** 1.00
Growth 0.05*** 0.14*** 0.30*** 0.27*** 0.30*** 0.45***

men (Male) will be positively associated with risk-taking
behavior (e.g., Levin, Snyder, and Chapmen, 1988; Powell
and Ansic, 1997) and that the percentage of married
individuals (Married) will be negatively associated with
this type of behavior. Control is a vector of firm-specific
control variables. We specifically consider Size (the log of
annual sales as reported in Compustat, item 12),15
Liquidity (the ratio of the cash balance, i.e., the ratio of
items 14 and 18 to item 8 lagged by one year), and two
measures of profitability, ROA (the ratio of Compustat item
18 divided by item 6 lagged by one year) and Loss
(a dummy variable that takes the value of one if ROA is
negative, and zero otherwise). We lag these control
variables by one period to mitigate any endogeneity
issues. We expect that firms that are smaller, more
leveraged, and more prone to losses will be more
positively correlated with risk. All of our variables are
winsorized at the 1% level, and we also include (but do not
tabulate) dummy variables for each year.
4.2. Main results
We present our main results in Table 3 using ordinary
least squares (OLS) estimation. All of the standard errors
are robust and are corrected for the clustering of
15
The results are similar when we use the log of total assets or the
log of market value.
observations by firm (clustering by year or using boot-
strapped standard errors gives very similar results). This
indicates that the effect of religiosity is consistent with
our predictions, in that it is negative for all of the
dependent variables except ROA, which has a predicted
positive coefficient.16 An F-test also indicates that the five
variables are jointly significant (p-value ¼ 0.000). We
obtain similar results if we use a Fama and MacBeth
(1973) procedure to estimate Model (1). The untabulated
t-statistics range between 5.02 and 8.90 for the
different dependent variables (4.69 for ROA). When we
decompose the total equity risk using the Capital Asset
Pricing Model (CAPM), we find that both the systematic
and the idiosyncratic components (untabulated) are lower
for ‘‘religious firms’’. These results (untabulated) also hold
when we substitute a measure of realized growth (the log
of the change in market value over ten years) for our ex
ante measure. These different results corroborate the
univariate results reported in Table 2 and support our
hypotheses. The economic magnitude is also significant.
An increase in one standard deviation of REL leads
to a 5% decrease in the median expected Growth. The
corresponding percentages for StdRet, StdRoa, ROA, Inv, and
16
Given that information concerning R&D is missing for many firms,
we estimate a Heckman selection model for this specification. The
results (untabulated) still hold.
 ARTICLE IN PRESS
464 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473

Table 3
Influence of religiosity—full sample—OLS specifications.
This table reports the OLS results using all of the available observations from 1971 to 2000. The dependent variables are as follows. StdRet is the log of
the standard deviation of the daily return calculated on a yearly basis. StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the ratio of
Compustat item 18 to item 6 lagged by one year. Inv is the investment rate in tangible capital (calculated as the ratio of Compustat item 128 to item 8
lagged by one year). RD is a measure of R&D activity (the ratio of Compustat item 46 to item 6 lagged by one year). Growth is the log of the ratio of the
market value of equity (as reported in CRSP) to the book value of assets (Compustat item 6 plus item 199 times item 25 minus items 60 and 74, scaled by
item 6). The independent variables are as follows. REL is the number of religious adherents in the county (as reported by ARDA) to the total population in
the county (as reported by the US Census Bureau). The demographic control variables are: size of the population in the county (Totpop), educational
attainment defined as the percentage of people 25 years and over having a bachelor’s, graduate, or professional degree (Edu), the male-to-female ratio
(Male), the average state money income (Money), the percentage of minorities (Minority) in the county, and the percentage of married people (Married) in
the state. The firm-level control variables are: Size (the log of annual sales as reported by Compustat, item 12), Liquidity (the ratio of cash balance, items
14 and 18, divided by item 8 lagged by one year), Loss (a dummy variable that takes the value of one if ROA is negative, and zero otherwise), and Leverage
(the leverage ratio: Compustat item 9 plus item 34 divided by item 9 plus item 34 plus item 60). Dummy variables for year are included but not tabulated.
Standard errors are robust and are corrected for clustering of observations by firms. T-statistics are reported in parentheses.

Variables Dependent variables

StdRet StdRoa ROA Inv RD Growth

REL 0.135 0.054 0.017 0.090 0.031 0.082

(3.22) (2.91) (2.32) (4.42) (3.06) (2.06)
Totpop 0.000 0.000 0.000 0.000 0.000 0.000
(1.41) (1.53) (2.49) (0.11) (6.15) (3.92)
Edu 0.464 0.150 0.045 0.332 0.100 0.442
(7.93) (4.06) (3.22) (11.10) (6.04) (7.29)
Male 0.007 0.001 0.000 0.005 0.003 0.007
(4.68) (1.23) (1.23) (6.94) (7.24) (4.88)
Money 0.000 0.000 0.000 0.000 0.000 0.000
(0.19) (1.24) (2.51) (0.82) (2.99) (0.59)
Minority 0.007 0.001 0.000 0.001 0.000 0.001
(3.70) (0.59) (1.21) (0.89) (0.91) (0.45)
Married 1.579 0.461 0.300 1.290 0.487 0.981
(8.74) (5.37) (8.07) (14.03) (11.88) (5.26)
Size 0.131 0.036 0.025 0.049 0.013 0.043
(59.85) (26.23) (42.09) (40.33) (22.38) (16.87)
Liquidity 0.005 0.043 0.029 0.005 0.009 0.024
(6.04) (18.49) (41.71) (4.00) (19.56) (19.31)
Loss 0.252 0.068 0.067 0.144 0.012 0.024
(27.53) (11.51) (24.43) (24.87) (5.32) (2.63)
Leverage 0.165 0.042 0.056 0.075 0.038 0.146
(14.39) (5.58) (17.79) (13.89) (14.91) (12.69)

Number of observations 71,727 113,383 130,241 119,857 60,932 103,253

Adj. R-square 39.21% 31.80% 35.73% 6.73% 25.04% 18.22%

RD are approximately 1%, 12%, 6%, 5%, and 14%, respec-
tively.
When we turn our attention to the control variables
across the different estimation procedures, the results are
generally consistent with our predictions. Education and
Male are consistently and positively associated with our
different measures of risk, whereas Married is negatively
associated with risk-taking behavior. The other demo-
graphic variables have a much less consistent effect across
our estimation procedures. However, the firm-specific
control variables have a more stable effect. For example,
we find, unsurprisingly, that larger firms are more stable
than smaller ones and that leveraged firms tend to be
riskier and to invest less. The R-square is reasonably high
in the different regressions (generally around 30%).17
Our results (untabulated) also hold when we include
lagged values of Growth, Inv, and ROA as the additional
17
We also tabulate the adjusted R2: the raw R2 values (untabulated)
are very similar to the unadjusted values.
control variables in our StdRet regression, when we
include StdRoa, Inv, and Growth in the ROA regression,
when we include Growth, StdRet, and ROA in our invest-
ment regression, and when we include StdRet, ROA, and
Inv in our Growth regression.
4.3. Robustness checks for the main results
Having established a link between religiosity and firm
behavior, we then perform different tests to evaluate the
robustness of our results. Unless we state otherwise, these
different robustness tests are based on the same sample
that we use in Table 3 (our so-called ‘‘full sample’’).
4.3.1. Sample size
First, we run our regressions using the four years for
which we have direct survey data on religiosity (1971,
1980, 1990, and 2000). This specification mixes both time-
series and cross-sectional elements. In this respect, it is
similar to our full sample, but the limited sample only
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G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473 465

focuses on the survey years. The results are reported in Table 4

Table 4. Although our sample size is smaller by approxi- Influence of religiosity—limited sample—OLS specifications.
This table reports the OLS results using the available observations in
mately sevenfold, our results still hold. Both the estimates
years 1971, 1980, 1990, and 2000. The dependent variables are as follows.
of the coefficients and the statistical significances are StdRet is the log of the standard deviation of the daily return calculated
reasonably close to those obtained in our full sample (the on a yearly basis. StdRoa is the standard deviation of ROA from year t5
magnitude of the coefficients is usually slightly larger and to t+5. ROA is the ratio of Compustat item 18 to item 6 lagged by one year.
the statistical significance slightly lower).18 This suggests Inv is the investment rate in tangible capital (calculated as the ratio of
Compustat item 128 to item 8 lagged by one year). RD is a measure of
that our linear interpolation does not create systematic R&D activity (the ratio of Compustat item 46 to item 6 lagged by one
noise in the sample. year). Growth is the log of the ratio of the market value of equity (as
In addition, we rerun our regressions at the county reported in CRSP) to the book value of assets (Compustat item 6 plus
level in Table 5. We perform this additional test to address item 199 times item 25 minus items 60 and 74, scaled by item 6). The
independent variables are as follows. REL is the number of religious
the concern that our observations may be clustered in a
adherents in the county (as reported by ARDA) to the total population in
limited number of counties. To do so, we calculate the the county (as reported by the US Census Bureau). The demographic
average values of the different variables over the entire control variables are: the size of the population in the county (Totpop),
sample period (1971–2000) and rerun the regressions educational attainment defined as the percentage of people 25 years and
treating each county as one observation (the standard over having a bachelor’s, graduate, or professional degree (Edu), the
male-to-female ratio (Male), the average state money income (Money),
errors are robust and are corrected for the clustering of
the percentage of minorities (Minority) in the county and the percentage
observations by state). Although this purely cross-sec- of married people (Married) in the states. The firm-level control variables
tional specification removes the temporal variations and are: Size (the log of annual sales as reported by Compustat, item 12),
drastically reduces the power of our tests, all of the Liquidity (the ratio of cash balance, items 14 and 18, divided by item 8
lagged by one year), Loss (a dummy variable that takes the value of one if
variables remain significant at the conventional levels (as
ROA is negative, and zero otherwise), and Leverage (the leverage ratio:
reported in Table 4). In other words, our results are not a Compustat item 9 plus item 34 divided by item 9 plus item 34 plus item
statistical artifact created by the large sample size. 60). Dummy variables for year are included but not tabulated. Standard
errors are robust and are corrected for clustering of observations by
firms. T-statistics are reported in parentheses.
4.3.2. Omitted variable
Another related concern is the possibility that our Variables Dependent variables
results are driven by an unspecified omitted variable. For
StdRet StdRoa ROA Inv RD Growth
this to be true, however, that omitted variable would have
to be correlated with religion but uncorrelated with the REL 0.214 0.140 0.018 0.056 0.039 0.113
factors known to explain religiosity at the individual level. (4.30) (4.18) (2.16) (2.24) (2.11) (2.34)
It would also have to be correlated with the many Totpop 0.000 0.000 0.000 0.000 0.000 0.000
different dependent variables in a way consistent with (0.86) (2.40) (0.46) (0.65) (3.23) (2.19)
Edu 0.457 0.165 0.035 0.299 0.158 0.458
our findings. Nevertheless, we perform several tests to (6.62) (2.96) (3.20) (9.33) (6.27) (6.94)
further mitigate this concern. Male 0.007 0.003 0.000 0.004 0.003 0.007
First, we add an array of additional variables to our (3.89) (1.62) (0.52) (3.81) (4.13) (3.50)
basic specifications. We find that our results (untabulated) Money 0.000 0.000 0.000 0.000 0.000 0.000
(0.15) (1.24) (4.05) (0.09) (0.79) (0.34)
hold when we include dummies for each four-digit
Minority 0.011 0.001 0.001 0.000 0.000 0.003
industry,19 when we include state dummies (to control, (4.43) (0.63) (1.52) (0.41) (0.30) (1.15)
for example, for differences in the legal and cultural Married 1.484 0.394 0.269 1.370 0.593 0.918
environment or in labor costs), and when we calculate the (6.42) (2.31) (7.30) (11.92) (7.39) (3.94)
religiosity at the state rather than the county level. They Size 0.097 0.040 0.015 0.027 0.021 0.046
(33.45) (13.51) (30.01) (19.06) (17.53) (14.37)
also hold when we include a long list of cultural variables, Liquidity 0.010 0.060 0.012 0.006 0.011 0.010
including different measures of education level,20 the (6.63) (12.21) (33.77) (5.03) (9.90) (5.70)
suicide rate,21 the alcohol consumption rate, the abortion Loss 0.334 0.120 0.091 0.139 0.041 0.028
rate,22 the percentage of Republican voters during pre- (16.75) (9.63) (28.73) (17.34) (7.71) (1.70)
Leverage 0.006 0.009 0.000 0.001 0.002 0.002
(0.66) (6.87) (0.51) (3.87) (8.59) (4.00)
18
In addition, we estimate our regressions for each individual year No. of 8,626 13,674 16,479 14,898 7,474 13,172
in 1971, 1980, 1990, and 2000. The results indicate that there is no observations
statistical difference between any of the coefficients associated with REL Adj. R-square 37.52% 35.81% 40.20% 9.23% 26.46% 8.07%
for the periods 1971–1980, 1980–1990, or 1990–2000.
19
The results hold if we use three-digit rather than four-digit
dummies.
20
We use the current expenditure per pupil, the average pupil/
teacher ratio in public elementary and secondary schools during Fall
1994, the estimated average annual salary of teachers in public
sidential elections,23 the log of the number of years that a
elementary and secondary schools, the percentage of all eligible students given state has been a part of the United States, the
taking the Scholastic Assessment Test (SAT), and the average SAT score in existence of a death penalty law in the state, the number
1994–1995. We obtained the data at http://www.stat.ucla.edu/datasets/ of prisoner executions in the state between 1976 and 2000
view_data.php?data ¼ 30.
21 (both the raw number and the number deflated by the
We use the state values for 1981–1990. We obtained the data from
www.cdc.gov.
22
We obtained the data for both alcohol consumption and abortion
23
at http://pubs.niaaa.nih.gov. We linearly interpolate between years.
 ARTICLE IN PRESS
466 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473

Table 5 spects, and quality of life,25 as they do when we control for

Influence of religiosity—county-level OLS specifications. such economic variables as the number of banks or bank
This table reports the OLS results using the available observations from
branches in the state in 1992 (either unscaled or scaled by
1971 to 2000. The average values of the different variables are calculated
for each county. The dependent variables are as follows. StdRet is the log the population of the state) and the average weekly wage
of the standard deviation of the daily return calculated on a yearly basis. in the county (as reported by the Bureau of Labor
StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the Statistics). Our results also hold (untabulated) when we
ratio of Compustat item 18 to item 6 lagged by one year. Inv is the control for the age of the firm, its effective tax rate, and a
investment rate in tangible capital (calculated as the ratio of Compustat
item 128 to item 8 lagged by one year). RD is a measure of R&D activity
measure of liquidity constraint (as defined in Lamont,
(the ratio of Compustat item 46 to item 6 lagged by one year). Growth is Polk, and Saa-Requejo, 2001). Finally, the results are
the log of the ratio of the market value of equity (as reported in CRSP) to robust to substituting county density for county popula-
the book value of assets (Compustat item 6 plus item 199 times item 25 tion and to adding the average county density in the state
minus items 60 and 74, scaled by item 6). The independent variables are
(to control for the density of the surrounding counties).
as follows. REL is the number of religious adherents in the county (as
reported by ARDA) to the total population in the county (as reported by Further, we reestimate our models in more homo-
the US Census Bureau). The demographic control variables are: the size genous subsamples. In particular, we restrict our data to
of the population in the county (Totpop), educational attainment defined the seven states in the West (Arizona, California, Idaho,
as the percentage of people 25 years and over having a bachelor’s, Nevada, Oregon, Utah, and Washington). This subsample
graduate, or professional degree (Edu), the male-to-female ratio (Male),
has high degrees of both geographical homogeneity and
the average state money income (Money), the percentage of minorities
(Minority) in the county, and the percentage of married people (Married) religious heterogeneity (Utah is the most religious state,
in the state. The firm-level control variables are: Size (the log of annual Arizona the tenth least religious, Nevada and Washington
sales as reported by Compustat, item 12), Liquidity (the ratio of cash the second and fourth least, and Oregon the least).
balance, items 14 and 18, divided by item 8 lagged by one year), Loss (a
Controlling for the two-digit SIC code indicator variables,
dummy variable that takes the value of one if ROA is negative, and zero
otherwise), and Leverage (the leverage ratio: Compustat item 9 plus item our results hold in these seven states. They also hold when
34 divided by item 9 plus item 34 plus item 60). Dummy variables for we split our sample between northern and southern
year are included but not tabulated. Standard errors are robust and are states, western and eastern states,26 states starting with a
corrected for clustering of observations by firms. T-statistics are reported letter before and after L (a random geographical partition),
in parentheses.
rural and urban counties (using the median county
Variables Dependent variables density as the cut-off point), and manufacturing and
service industries (using SIC code 4000 as the cut-off). The
StdRet StdRoa ROA Inv RD Growth results also remain robust to further limiting the sample
to coastal states or splitting it into two time periods (from
REL 0.217 0.065 0.030 0.136 0.044 0.234
(2.36) (1.95) (1.66) (1.93) (1.88) (2.33) 1971 to 1985 and from 1986 to 2000). To further ensure
Totpop 0.000 0.000 0.000 0.000 0.000 0.000 that our results are not driven by the industry composi-
(2.31) (2.95) (2.60) (2.74) (1.99) (2.00) tion of our sample, we calculate the mean of REL for each
Edu 0.678 0.585 0.191 1.005 0.249 0.856 two-digit industry. We then delete the observations from
(3.66) (6.91) (4.76) (5.07) (3.56) (4.15)
Male 0.001 0.002 0.001 0.001 0.001 0.003
industries in which the distance between the industry
(0.33) (1.31) (1.55) (0.50) (0.88) (0.84) mean and the sample mean is greater than two standard
Money 0.000 0.000 0.000 0.000 0.000 0.000 deviations of the former and run our baseline regressions
(1.59) (2.30) (2.34) (0.52) (1.22) (0.02) on the truncated sample. The results (untabulated) hold.
Minority 0.026 0.008 0.001 0.008 0.000 0.004
In fact, the results even hold when we delete industries up
(5.03) (3.58) (0.73) (2.15) (0.47) (0.93)
Married 1.301 0.677 0.568 0.765 0.323 1.01 to one-quarter of a standard deviation. All of the variation
(3.00) (3.17) (5.57) (1.36) (2.46) (1.94) in REL that is due to industry composition is essentially
Size 0.080 0.022 0.025 0.060 0.011 0.045 removed at this point. These results confirm those we
(7.49) (5.58) (10.85) (4.11) (4.59) (3.45) obtain when we include industry dummies or when we
Liquidity 0.034 0.024 0.025 0.007 0.017 0.069
split the sample based on industry composition.
(2.36) (5.14) (6.15) (0.42) (3.75) (6.64)
Loss 0.158 0.010 0.074 0.005 0.083 0.139 Next, we form different matched samples. First, we
(2.00) (0.31) (4.50) (0.08) (3.11) (1.48) match observations based on size and then on industry
Leverage 1.511 0.171 0.204 0.777 0.254 0.344 (according to the four-digit SIC code). We reestimate our
(5.98) (2.07) (4.07) (4.58) (4.39) (1.18)
main specifications in these two samples and then obtain
No. of observations 814 911 968 866 670 822 a predicted value for the dependent variables using the
Adj. R-square 28.71% 40.91% 52.62% 14.73% 33.22% 23.00% baseline model described in Eq. (1), but excluding REL
from the regressions. We then divide the overall sample
into three groups based on religiosity. We form a matched
sample based on the predicted value of the dependent
state population), and the percentage of the state’s variable using an equal number of observations from the
population that is incarcerated.24 The results also hold highest and lowest religiosity groups and investigate
when we include different measures of state attractive-
ness to businesses, such as business costs, labor quality,
25
regulatory environment, economic climate, growth pro- We obtained the data from http://www.forbes.com.
26
The one exception is that REL is insignificant in the subsample of
eastern states when Growth is the dependent variable. Following the US
Census, we use the Illinois-Alabama line as a separation between the
24
We obtained the data at www.deathpenaltyinfo.org. East and the West.
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
whether there is a systematic difference between the
mean and the median of the dependent variables in these
matched samples (we do this both pairwise and overall).
The results are consistent with our hypotheses: the mean
and median of StdRet, StdRoa, Inv, RD, and Growth are
lower for firms located in more religious environments,
and the opposite is true for ROA (p-values ¼ 0.000 in
all cases). Binomial tests also confirm these results
(p-values ¼ 0.000 in all cases). We conclude that our results
are unlikely to be driven by nonlinearities in the data.
Finally, although our results are largely cross-sectional
in nature, we estimate a county-level panel specification
(untabulated).27 The conclusions are qualitatively similar,
even though this specification is quite taxing because
religiosity is reasonably stable over time.
4.4. Causality
We then investigate whether the correlations found in
the previous specifications are causally linked. In other
words, does the religious make-up of the population cause
firms to behave in a certain way, or does the behavior of
firms attract people of certain faiths or no faith to live in
the county?28 To answer this question, we perform two
additional tests.
We first reproduce our OLS results using a two-stage
least squares approach. Aside from investigating causality,
using a 2SLS approach has two additional advantages.
First, it mitigates the effect of any potential measurement
errors in the level of religiosity (although it is not
immediately obvious why this measurement error would
be correlated with dependent variables such as the
variance in a firm’s returns or its investment rate). Second,
an instrumental variable approach removes the estima-
tion bias caused by an omitted correlated variable if the
instruments are uncorrelated with this omitted variable
and are sufficiently correlated with the endogenous
elements of the variable of interest (e.g., Wooldridge,
2002). Although we are unable to test whether these two
conditions are met in our specifications, the 2SLS
approach provides an additional assurance against the
risk that our results are driven by an omitted variable. In
our full sample, we use REL lagged by three years as the
first instrument in all of the specifications. In addition, we
use the county population lagged by three years, except in
the RD specification for which we use the median age of
the population lagged by three periods. In our limited
sample, all of the instrument variables are lagged by ten
years. The F-statistics in the first-stage regression are very
high (p-value ¼ 0.000 in all cases), and the Hansen J-test
fails to reject the orthogonality condition (for example,
27
We use a firm-specific random-effect model with a correction for
serial correlation, but omit the year dummies.
28
In this section, we do not investigate the issue of whether
religiosity at the individual level causes greater risk aversion, or whether
risk-averse individuals are attracted to religious activities. As our main
purpose is to study the effect of the demographic make-up of the
population on firm behavior, this interesting question is not central to
our study. It is sufficient for our purposes to show that there is a
correlation at the individual level between religiosity and risk aversion.
467
the p-values are between 0.33 and 0.78 in our full sample),
which suggests that the instruments are both valid and
adequate. Again, the standard errors are robust and are
corrected for the clustering of observations by firm. We
tabulate the results in Table 6 for both our full sample
(Panel A) and our limited sample (Panel B).29 To save
space, we only tabulate the key statistics, although the
regression specifications include our usual demographic
and firm-specific control variables. The results are similar
to those reported in Tables 3 and 4. REL is significant in all
of the specifications, although the magnitude of the
coefficients is slightly smaller. The results are also similar
when we use the 2SLS specification with county random
effects in the full sample.
We then calculate the mean (and the median) of each
variable on a yearly basis to obtain a pure time series of
the different variables (i.e., we use only 30 observations
for this test). We use a balanced panel to calculate these
time series (to make sure that our results are not caused
by firms entering or leaving our sample or changing
location), but the results are similar to when we use an
unbalanced one. The Chi-square statistics indicate that
REL Granger-causes the effect on our dependent variable.
This result holds when we use the time series of either the
means or the medians (the p-values ¼ 0.000 for all
cases).30 In other words, our results hold not only in the
panel and pure cross-section specifications, but also in the
pure time-series tests. A standard criticism of the Granger
causality test is that a time series could be capturing
expectations about future behavior. In our setting, this
alternative explanation would imply that the religious
composition of a county could change because people
expected that the standard deviation of return, for
example, would decrease in the future. This strikes us as
implausible.
We conclude from these different tests that a change in
the religious environment of a firm is likely to cause a
change in its behavior.
4.5. Missing value for R&D expenses
In our main specification, we treat firms that did not
report any research and development (R&D) expenses as
missing observations. This is because firms have some
latitude in reporting these expenses. Thus, the absence of
reported R&D expenses in Compustat does not necessarily
mean that the firm is not engaged in any R&D activities. To
estimate the sensitivity of our results to this assumption,
we perform several untabulated robustness checks. First,
we estimate a Heckman selection model to account for the
fact that the omission is not random. Second, we code the
firms that do not report any R&D expenses as zero. Third,
we follow a similar approach, but include an indicator
variable that takes the value of one if the firm did not
report any R&D expenses, and zero otherwise. Finally, we
estimate the predicted value of R&D based on firm size,
29
The tabulated results exclude state dummies, but are similar to
those obtained when we include these additional variables.
30
We use a three-year lag specification in the Granger-causality test.
 ARTICLE IN PRESS
468 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473

Table 6
Influence of religiosity—2SLS specifications.
This table reports the 2SLS results using the available observations (full sample) from 1971 to 2000 in Panel A, and using the limited sample of years
1971, 1980, 1990, and 2000 in Panel B. The dependent variables are as follows. StdRet is the log of the standard deviation of the daily return calculated on a
yearly basis. StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the ratio of Compustat item 18 to item 6 lagged by one year. Inv is the
investment rate in tangible capital (calculated as the ratio of Compustat item 128 to item 8 lagged by one year). RD is a measure of R&D activity (the ratio
of Compustat item 46 to item 6 lagged by one year). Growth is the log of the ratio of the market value of equity (as reported in CRSP) to the book value of
assets (Compustat item 6 plus item 199 times item 25 minus items 60 and 74, scaled by item 6). The independent variables are as follows. REL is the
number of religious adherents in the county (as reported by ARDA) to the total population in the county (as reported by the US Census Bureau). The
demographic control variables are: the size of the population in the county (Totpop), educational attainment defined as the percentage of people 25 years
and over having a bachelor’s, graduate, or professional degree (Edu), the male-to-female ratio (Male), the average state money income (Money), the
percentage of minorities (Minority) in the county, and the percentage of married people (Married) in the state. The firm-level control variables are: Size
(the log of annual sales as reported by Compustat, item 12), Liquidity (the ratio of cash balance, items 14 and 18, divided by item 8 lagged by one year), Loss
(a dummy variable that takes the value of one if ROA is negative, and zero otherwise), and Leverage (the leverage ratio: Compustat item 9 plus item 34
divided by item 9 plus item 34 plus item 60). Dummy variables for year are included but not tabulated. Standard errors are robust and are corrected for
clustering of observations by firms. T-statistics are reported in parentheses.

Panel A: Full Sample specification

Variables Dependent variable

StdRet StdRoa ROA Inv RD Growth

REL 0.186 0.147 0.027 0.108 0.040 0.096

(4.07) (6.73) (2.94) (5.02) (3.48) (2.29)
First-stage F-statistics 0.00 0.00 0.00 0.00 0.00 0.00
Second-stage Hansen J 0.287 0.023 0.362 0.021 1.003 0.698

No. of observations 64,499 56,834 124,867 114,879 54,789 98,298

Centered R2 35.82% 30.41% 35.58% 6.54% 24.54% 15.71%

Panel B: Limited sample specification

Variables Dependent variable

StdRet StdRoa ROA Inv RD Growth

REL 0.278 0.177 0.020 0.072 0.047 0.121

(5.23) (4.65) (2.40) (2.85) (2.30) (2.45)
First1stage F-statistics 0.00 0.00 0.00 0.00 0.00 0.00
Second-stage Hansen J 1.205 0.978 1.249 0.973 1.286 0.323

No. of observations 7,571 11,889 13,932 12,637 6,421 10,736

Centered R2 37.50% 35.80% 40.20% 9.22% 26.46% 8.51%

industry (by the four-digit SIC code), and year for the
observations in which R&D expenses are present and use
the predicted value when the actual value is missing. Our
conclusions are qualitatively similar, and REL remains
significant in all of the specifications (with t-statistics
between 2.02 and 4.56).
5. Additional empirical analysis
We also perform three additional empirical analyses.
First, we consider whether different religious groups are
associated with different levels of risk aversion. Second,
we examine how investors evaluate the decisions of firms
with a high level of religiosity. Finally, we test whether our
findings have any implications for the managerial labor
market.
5.1. Religious affiliation and firm behavior
but separate the two main religious groups (Protestant
and Catholic).31 We then estimate a model similar to (1)
but with a proxy for religiosity for each denomination. We
report the results in Table 7 for our full sample (Panel A)
and our limited sample (Panel B). To save space, we only
tabulate the key statistics but we include our usual
control variables in the specifications. The results indicate
that Protestants are most consistently associated with
corporate risk aversion. Protestant is significant in all six
regressions (both in Panels A and B) and the F-test
indicates that the variable is jointly significant in the six
regressions (p-value ¼ 0.00 in both the full and the
limited samples). This result is perhaps surprising given
the Weberian perception that the Protestant work ethic
has a positive effect on growth. However, more recent
studies suggest that the analysis done by Weber was
incorrect (see Iannaccone, 1998). Our result highlights the
complexity of religious phenomena. Catholic also has the

First, we consider potential differences across religious 31

We do not analyze the other denominations given their small
groups. To this end, we form two variables similar to REL demographic presence.
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473 469

Table 7
Differences across religious groups—OLS specifications.
This table reports the OLS results using the available observations (full sample) from 1971 to 2000 in Panel A, and using the limited sample for years
1971, 1980, 1990, and 2000 in Panel B. The dependent variables are as follows. StdRet is the log of the standard deviation of the daily return calculated on a
yearly basis. StdRoa is the standard deviation of ROA from year t5 to t+5. ROA is the ratio of Compustat item 18 to item 6 lagged by one year. Inv is the
investment rate in tangible capital (calculated as the ratio of Compustat item 128 to item 8 lagged by one year). RD is a measure of R&D activity (the ratio
of Compustat item 46 to item 6 lagged by one year). Growth is the log of the ratio of the market value of equity (as reported in CRSP) to the book value of
assets (Compustat item 6 plus item 199 times item 25 minus items 60 and 74, scaled by item 6). The independent variables are as follows. Protestant and
Catholic are the number of religious adherents to these two religious groups in the county (as reported by ARDA) divided by the total population in the
county (as reported by the US Census Bureau). The demographic control variables are: the size of the population in the county (Totpop), educational
attainment defined as the percentage of people 25 years and over having a bachelor’s, graduate, or professional degree (Edu), the male-to-female ratio
(Male), the average state money income (Money), the percentage of minorities (Minority) in the county, and the percentage of married people (Married) in
the state. The firm-level control variables are: Size (the log of annual sales as reported by Compustat, item 12), Liquidity (the ratio of cash balance, items 14
and 18, divided by item 8 lagged by one year), Loss (a dummy variable that takes the value of one if ROA is negative, and zero otherwise), and Leverage (the
leverage ratio: Compustat item 9 plus item 34 divided by item 9 plus item 34 plus item 60). Dummy variables for year are included but not tabulated.
Standard errors are robust and are corrected for clustering of observations by firms. T-statistics are reported in parentheses.

Panel A: Full sample specification

Variables Dependent variables

StdRet StdRoa ROA Inv RD Growth

Protestant 0.310 0.121 0.071 0.123 0.072 0.375

(5.40) (4.93) (5.93) (4.35) (6.84) (6.73)
Catholic 0.162 0.092 0.026 0.121 0.017 0.129
(3.83) (5.12) (3.00) (5.90) (1.72) (3.22)

No. of observations 71,727 113,383 130,241 119,857 60,932 103,253

Adj. R-square 39.33% 30.39% 35.78% 6.76% 25.37% 18.45%

Panel B: Limited sample specification

Variables Dependent variables

StdRet StdRoa ROA Inv RD Growth

Protestant 0.352 0.160 0.071 0.237 0.127 0.427

(4.76) (3.54) (3.67) (4.25) (5.15) (6.32)
Catholic 0.250 0.120 0.027 0.080 0.030 0.149
(4.26) (3.52) (1.84) (1.74) (1.66) (3.00)

No. of observations 8,626 13,674 16,479 14,898 7,474 13,172

Adj. R-square 37.65% 35.80% 42.81% 9.89% 26.67% 8.40%

predicted sign and significance (except for Growth in Panel
A and RD and ROA in Panel B, which are significant at the
10% level), but the magnitude and the statistical signifi-
cance are lower than for Protestant in all regressions. The
F-test indicates that the variable is jointly significant in
the six regressions (p-value ¼ 0.00 in the full sample and
0.02 in the limited sample). This result is consistent with
the finding of Barsky, Juster, Kimball, and Shapiro (1997)
that Protestants are generally more risk averse than
Catholics. This result is also interesting because counties
are mostly religiously homogenous, which leads to a
negative correlation between Protestant and Catholic
(0.60, p-value ¼ 0.000). The fact that both Protestant
and Catholic are significant in spite of being strongly
negatively correlated suggests that REL does not proxy for
a correlated omitted variable in our main tests. The
variance inflation factors (VIF) for Protestant and Catholic
are around 2.4, well below the commonly accepted
threshold of ten, suggesting that multicollinearity is not
driving this additional finding.
We then investigate whether our results are exacer-
bated by the most conservative Protestant denominations.
On the one hand, conservative Protestants appear to be
more involved in religious life. For example, they are more
likely to go to church or to make financial contributions to
religious institutions. On the other hand, it is not clear
that their theological conservatism translates into differ-
ent attitudes toward business activity (see Iannaccone,
1998, for a review of these different arguments). There-
fore, we treat this issue as an empirical question. Again,
we follow the ARDA typology to record a denomination as
conservative or not to obtain an external validation on the
classification but we acknowledge that this classification
contains an element of subjectivity. According to this
typology, ‘‘charismatic’’ or ‘‘pentecostal’’ churches are
classified as conservative. Specifically, we define ConsProt
as the analog of Protestant for conservative denomina-
tions. Our results (untabulated) indicate that more
conservative denominations are associated with lower
growth, lower RD efforts, lower volatility of ROA, and
higher ROA. The coefficient in the StdRet and Inv regres-
sions is also negative but is not significant at conventional
levels. A joint test indicates that ConsProt is jointly
significant in the six regressions in both our full and
limited samples (p-value ¼ 0.00 in both cases). REL
remains significant in all regressions. We conclude that
 ARTICLE IN PRESS
470 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473
conservative denominations tend to exacerbate our find-
ings but that the effect is not very robust, perhaps because
our classification is too crude.
5.2. How do investors evaluate the decisions of firms with a
high level of religiosity?
We next consider the market reaction to the decisions
of firms. Our main hypothesis predicts that firms that are
located in more religious counties are more risk averse
and therefore use a higher discount rate when making
decisions. If this is the case, these firms should only accept
projects when the undiscounted cash-flows are signifi-
cantly above the corresponding threshold for less risk-
averse investors and pass on projects with positive but
low undiscounted cash-flows. Consistent with this view,
our previous results established that firms that are located
in a more religious environment invest less and have a
higher undiscounted profitability. This reasoning implies
that the market reaction to the announcement of major
investment and financing decisions should be more
positive for firms that are located in more religious
counties if the marginal investor in the equity market of
these firms is less risk averse than the firm’s managers. In
other words, a zero net present value project for a risk-
averse firm may be a positive net present value project for
a less risk-averse investor. Thus, there should be a positive
market reaction when the investment decision is an-
nounced.
To test this possibility, we consider the market reaction
to major investment and financing decisions and the
influence of the religious environment of the firms. More
specifically, we consider the three-day market reaction to
the announcement of mergers and acquisitions (M&A) and
the announcement of seasonal equity offerings (SEO) for
the period 1971 to 2000. We calculate the three-day
market reaction around the event date (from t1 to t+1)
using the CRSP daily file adjusted for the value-weighted
market return. The event date is the announcement date
of either the M&A or equity financing.32 Both event dates
come from the Securities Data Company (SDC) database.
We also consider the reaction to large tangible invest-
ments by calculating the ratio of change in gross plant,
property, and equipment (PPE) scaled by the previous
amount of gross PPE. We split the overall sample into ten
deciles based on this investment rate and focus on the
highest deciles. We then calculate the buy-and-hold
return (BHAR), adjusted for the industry return, for the
corresponding quarter. Finally, we regress our two
cumulative abnormal returns (CAR)s and the BHAR on
REL and our other control variables. We predict that REL
will be significantly associated with our three measures of
returns.
The results that are reported in Table 8 support this
view, and indicate that REL is positively associated with
the three-day market reaction when firms announce an
32
We use the date when the equity issuance was filed with the
Securities an Exchange Commission (SEC) as the event date for equity
financing.
M&A project or the issuance of outside financing. In
addition, REL is positively associated with the quarterly
BHAR when firms are engaged in a large tangible
investment project. The respective t-statistics are 2.03,
2.50, and 1.96. This means that there is a more positive
market reaction when firms that are located in a more
religious environment make a significant investing or
financing decision. These results are consistent with our
main hypothesis and empirical results.
5.3. Religiosity and CEO
Finally, we finish our empirical analysis by considering
the effect of corporate culture on CEO selection. We
mentioned in our hypothesis development section that we
expect that managerial style, corporate culture, and
investment behavior should be congruent. However, it is
difficult to obtain a direct measure of the religiosity of the
CEO. Therefore, we use an indirect approach to explore
this idea and examine a sample of 65 CEOs who changed
employers from 1991 to 2003.33 We regress the religiosity
of the county where the new employer is located (REL) on
the religiosity of the county where the former employer is
located (OldREL).34 If risk aversion is a stable parameter
for CEOs, then we expect CEOs to operate in similar
environments and predict that the two measures of
religiosity will be related.
We use four specifications. The first is simply a
univariate regression of REL on OldREL. The second
specification is similar, but also controls for the different
demographic variables that we have previously used
(population, education, male-to-female ratio, wealth, the
percentage of minorities, and marital status). The vari-
ables are measured for the county in which the former
employer is located. In the third specification, we add the
demographic variables for the county in which the new
employer is located. We also include an indicator variable
that takes the value of one if the CEO remained in the
same state after changing companies, and zero otherwise.
Finally, in the fourth specification we control for various
CEO characteristics, specifically, the tenure of the CEO at
the firm of departure (Tenure), the size of the board of
directors at the firm of departure (BoardSize), the market
perception of the quality of the CEO (CAR), and whether
the CEO was a founder of the firm of departure (Founder).
We also control for the characteristics associated with the
move from one firm to another, and specifically whether
the CEO received an increase in compensation (High-
Comp), and for the reasons that motivated the CEO’s
departure (Scandal, Policy, Personal, Performance). We also
control in this specification for the fact that the CEO may
have stayed in the same industry (SameInd).
Results tabulated in Table 9 indicate that the religiosity
of the county where the new employer is located is a
predictor of the religiosity of the county where the former
33
We thank Yuk Ying Chang and Sudipto Dasgupta for providing this
data set to us.
34
We use religiosity as reported by ARDA for the year 1990. The
standard errors are corrected for heteroskedasticity.
 ARTICLE IN PRESS
G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473 471

Table 8 Table 9
Market reaction to major corporate decisions. Influence of religiosity on CEO movements—OLS specifications.
This table reports the market reaction to financing, investment, and This table reports the influence of religiosity on CEO movements
M&A announcements for the 1971–2000 period. The dependent between 1991 and 2003. The dependent variables are as follows. REL is
variables are: CAR1, which is the three-day abnormal return around the number of religious adherents in the county (as reported by ARDA)
the SEO announcement date; BHAR, which is the industry-adjusted buy- divided by the total population in the county (as reported by the US
and-hold return for a quarter in which a major tangible investment took Census Bureau). The demographic control variables are: the size of the
place; and CAR2, which is the three-day abnormal return around an M&A population in the county (Totpop), the educational attainment defined as
announcement date. The independent variables are as follows. The the percentage of people 25 years and over having a bachelor’s, graduate,
demographic control variables are: the size of the population in the or professional degree (Edu), the male-to-female ratio (Male), the average
county (Totpop), educational attainment defined as the percentage of state money income (Money), the percentage of minorities (Minority) in
people 25 years and over having a bachelor’s, graduate, or professional the county, and the percentage of married people (Married) in the state.
degree (Edu), the male-to-female ratio (Male), the average state money The prefix Old indicates the value for the county where the former firm
income (Money), the percentage of minorities (Minority) in the county, of the CEO is located. Without the prefix, the value refers to the county of
and the percentage of married people (Married) in the state. The firm- the firm that the CEO is joining. SameState is an indicator variable that
level control variables are: Size (the log of annual sales as reported by takes the value of one if the CEO remained in the same state, and zero
Compustat, item 12), Liquidity (the ratio of cash balance, items 14 and 18, otherwise. Tenure is the number of years the executive was employed as
divided by item 8 lagged by one year), Loss (a dummy variable that takes CEO in the firm of departure. BoardSize is the size of the board of
the value of one if ROA is negative, and zero otherwise), and Leverage (the directors at the firm of departure. CAR is the three-day market reaction to
leverage ratio: Compustat item 9 plus item 34 divided by item 9 plus the firm when the CEO’s departure was announced. Founder is an
item 34 plus item 60). Dummy variables for year are included but not indicator variable that takes the value of one if the CEO was a founder of
tabulated. Standard errors are robust and are corrected for clustering of the firm of departure, and zero otherwise. HighComp is an indicator
observations by firms. We include but do not tabulate industry (four- variable that takes the value of one if the salary of the CEO at the new
digit SIC) fixed effects in the tests. T-statistics are reported in firm was higher than the salary at the firm of departure, or if the value of
parentheses. the assets of the new firm was greater than the value of the assets of the
firm of departure, and zero otherwise. Scandal is an indicator variable
Variables Dependent variables that takes the value of one if the reason for the CEO’s departure was
related to fraud, lawsuits, sexual harassment, or accounting irregula-
CAR1 (financing) BHAR (investment) CAR2 (M&A) rities, and zero otherwise. Policy is an indicator variable that takes the
value of one if the reason for the CEO’s departure was related to policy
REL 0.036 0.384 0.008 issues, and zero otherwise. Personal is an indicator variable that takes the
(2.03) (2.50) (1.96) value of one if the stated reason for the CEO’s departure was personal in
Totpop 0.000 0.000 0.000 nature, and zero otherwise. Performance is an indicator variable that
(0.40) (0.37) (0.57) takes the value of one if the CEO’s departure was related to firm
Edu 0.019 0.027 0.002 performance, and zero otherwise. SameInd is an indicator variable that
(0.88) (0.13) (0.44) takes the value of one if the CEO joined a new firm in the same industry
Male 0.000 0.008 0.000 as the firm of departure, and zero otherwise.
(0.18) (1.98) (0.89)
Money 0.000 0.000 0.000 Variables Dependent variables
(1.32) (0.13) (0.27)
Minority 0.001 0.008 0.000 REL REL REL REL
(1.80) (1.00) (0.20)
Married 0.060 1.122 0.024 OldREL 0.40 0.39 0.35 0.59
(0.74) (1.64) (1.46) (3.34) (2.56) (1.98) (3.36)
Size 0.003 0.033 0.003 OldTotpop 0.12 0.09
(2.62) (4.00) (11.90) (1.70) (1.16)
Liquidity 0.001 0.019 0.000 OldEdu 0.23 0.33
(1.60) (2.56) (2.98) (0.24) (0.33)
Loss 0.009 0.153 0.005 OldMale 0.01 0.01
(0.55) (2.47) (1.99) (1.06) (0.75)
Leverage 0.018 0.005 0.001 OldMoney 0.00 0.00
(2.40) (18.16) (1.72) (2.03) (1.63)
OldMinority 0.01 0.00
No. of observations 2,043 6,268 25,623
(0.07) (0.01)
Adj. R-square 2.02% 2.26% 1.90%
OldMarried 0.09 2.13
(0.02) (0.41)
Totpop 0.01
(0.01)
employer is located (OldREL). This finding holds in all four
Edu 0.00
specifications, with t-statistics ranging from 2.0 to 3.4. (0.01)
This is consistent with the observation that CEOs Male 0.00
consistently choose to work for organizations that are (0.15)
likely to exhibit the same culture. The other demographic Money 0.00
(1.13)
variables are either statistically insignificant or have an
Minority 0.00
unstable effect. Most of the control variables in the fourth (0.02)
specification are also insignificant. However, Founder is Married 4.06
significantly negatively related to REL. This indicates that (1.12)
SameState 0.22
entrepreneurs are less likely to move to a religious county
(1.03)
when they quit their firm. To the extent that entrepre- Tenure 0.00
neurs are less risk averse, this result is consistent with our (0.37)
general hypothesis. Scandal is also significantly negative, BoardSize 0.03
which suggests that CEOs who have to leave their firms for (1.13)
 ARTICLE IN PRESS
472 G. Hilary, K.W. Hui / Journal of Financial Economics 93 (2009) 455–473

Table 9 (continued ) variables (including the demographic control variables

Variables Dependent variables
REL REL REL
CAR
(0.97)
Founder
(4.22)
HighComp
Scandal
(4.58)
Policy
Personal
Performance
SameInd
(2.28)
No. of observations 65 65 65
R-square 19.03% 22.78% 27.62%
reasons such as fraud, lawsuits, sexual harassment, or
accounting irregularities tend to stay away from religious
counties. Finally, Performance and SameInd are also
significant.
6. Conclusion
Our primary objective is to examine if the level of
religiosity in a firm’s environment affects its corporate
behavior and investment decisions in particular. Our
results complement findings at the country level relating
growth to religion but we focus on a single country (the
US) with a high level of religious activity. Therefore, all the
firms in our sample are located in very similar legal and
economic environments. Prior research in psychology and
anthropology has suggested a positive link between
individual religiosity and risk aversion. We find that this
relation also influences organizational behavior. Specifi-
cally, firms that are located in a US county with high levels
of religiosity exhibit lower risk exposure as measured by
the variance in equity returns and in ROA. They have a
higher ROA, consistent with a higher required internal rate
of return. They tend to invest less in capital and engage
less in R&D activity, but investors react more positively to
their investment decisions. Not surprisingly, their long-
term growth is also lower. Finally, we find that CEOs tend
to join firms with a similar culture after they leave their
current employer. The effects are both economically and
statistically significant. They are robust to different
specifications (including a 2SLS approach and a Granger-
causality test, suggesting that there is a causal relation
between the demographic environment of the firm and its
behavior). In particular, we perform different checks to
ensure that these results are not driven by omitted
variables. For example, we use a multiplicity of dependent
variables to ensure that our results are not attributable to
any particular construct. We also control for numerous
that have been shown to be correlated with religiosity at
individual levels). Our results hold in pure time-series and
REL in pure cross-sectional specifications, indicating that any
correlated omitted variable would have to be associated
0.60 with both the geographical and temporal variations of
religiosity. In addition, the results hold in many different
0.57
subsamples based on geography, industry composition,
0.16 and time periods. They also hold after including numerous
(0.70) variables controlling for potential differences in the
1.51 cultural, social, and economic environment of the firm.
Finally, we also find that both Protestants and Catholics
0.12
0.34 have a significant effect, even though the presence of
(0.04) these two groups is very negatively correlated at the
(0.25) county level.
0.72
(3.17)
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