H. Chen et al.

/ Journal of Banking and Finance 70 (2016) 70–85 1

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Journal of Banking and Finance

journal homepage: www.elsevier.com/locate/jbankfin

Religiosity and the cost of debt6

Hanwen Chen a, Henry He Huang b, Gerald J. Lobo c,∗, Chong Wang d
a
University of International Business and Economics, China
b
Sy Syms School of Business, Yeshiva University, United States
c
C. T. Bauer College of Business, University of Houston, Houston, TX 77204-6021, United States
d
Von Allmen School of Accountancy, University of Kentucky, United States

A r t i c l e i n f o A B st r ACt

Article history: In a cross-country setting, we document that stronger religiosity is associated with lower loan interest
Received 23 June 2014
spread. In addition, we show that this negative association is more pronounced in countries with weaker
Accepted 5 June 2016
creditor rights, suggesting that religious values play a more significant role in constraining opportunistic
Available online 14 June 2016
behavior in a weaker legal environment. Our analysis reveals that stronger religiosity is also related to
JEL: other favorable terms in loan contracting, such as larger facility amount, use of accounting-based per-
G12 formance pricing, and lower upfront fee. Corroborating our cross-country findings, we also show that in
G15 the U.S. setting, firms in regions with stronger religiosity enjoy lower loan interest spread. Our study
contributes to understanding the important role religiosity plays in debt financing.
Keywords:
© 2016 Elsevier B.V. All rights reserved.
Religiosity
Cost of debt
Creditor rights
Religious diversity

1. Introduction
Given that bank loans are the primary source of financing
for most economies, the cost of debt plays a significant role in
an economy’s growth and performance (Qian and Strahan 2007).
The extant literature shows that the cost of debt is heavily influ-
enced by country-level legal institutions and political institutions
(La Porta et al., 1997, 1998; Djankov et al., 2007; Qian and Strahan
2007; Qi et al., 2010). Religion, an important part of a country’s
culture, influences both legal and political institutions, and thus
can impact the cost of debt indirectly (La Porta et al., 1999; Stulz
and Williamson 2003). As religions shape cultural values and affect
individual decision-making, religiosity can directly enhance busi-
ness ethics and constrain opportunistic behaviors in business con-
tracting and financial reporting (Hilary and Hui 2009; McGuireet
al., 2012; Kanagaretnam et al., 2015b). We thus propose that reli-
giosity can also exert a distinct and direct impact on the cost of
6
We thank Wenli Huang, James Ohlson, and the participants at the Journal of In-
ternational Accounting Research (JIAR) 2014 Conference for their helpful comments.
Chen and Wang thank the National Natural Science Foundation of China (Project
No.71332008) for its financial support. Wang acknowledges research support from
the Gatton College and the Gatton Fellowship, Mullineaux Fellowship, Steckler Fel-
lowship and Luckett fellowships.
∗
Corresponding author. Fax: +1 713 743 4828.
E-mail addresses: chenhanwen@vip.sina.com (H. Chen), henry.huang@yu.edu
(H.H. Huang), gjlobo@uh.edu (G.J. Lobo), chongwang85@uky.edu (C. Wang).
debt.1 Specifically, we examine whether religiosity relates to the
cost of debt in a country over and above the effects of legal and
political institutions.
Religiosity can directly affect a firm’s cost of bank borrowing
through at least three channels. First, prior studies indicate that
religiosity is positively related to risk aversion (Miller and Hoff-
mann 1995; Dehejia et al., 2005).2 Consistent with these find-
ings, Hilary and Hui (2009) document that firms in environments
with stronger religiosity display lower variance in equity returns.
This risk-aversion reduces the borrowing firm’s return volatility
and its likelihood of investing in risky projects that could expro-
priate wealth from debt holders (the asset substitution problem),
thereby reducing the cost of borrowing charged by banks. In a
cross-country study, Kanagaretnam et al., (2015a) document that
1
While some papers focus on the type of religion (e.g., Catholic and Protestant
as in Stulz and Williamson (2003)), we follow recent literature (e.g., Hilary and Hui
2009; McGuire et al., 2012), and focus on religiosity, the level of belief in religion,
regardless of the type of religion. One contribution of our paper is that we provide
evidence that universal religious values help mitigate lending costs. Nevertheless,
we also explore how religious diversity and different types of religions affect the
cost of debt.
2
Different religions may have different levels of risk aversion. For example,
Kumar et al., (2011) show that regional concentration of Catholic population (i.e.,
the ratio of Catholics to Protestants) is positively correlated with gambling propen-
sity indicating that Catholics are less risk averse.

http://dx.doi.org/10.1016/j.jbankfin.2016.06.005
0378-4266/© 2016 Elsevier B.V. All rights reserved.
 Journal of Banking and Finance 70 (2016) 70–85
banks in more religious countries make less risky loans and have
lower asset return volatility.
Second, religiosity is associated with higher ethical standards
and can serve as a key social mechanism to constrain manage-
rial opportunism (Weaver and Agle 2002). For example,
Parboteeah et al. (2008) report that country-level religiosity is
positively as- sociated with people’s ethical choices. Grullon et al.
(2010) and McGuire et al. (2012) find that firms in more
religious areas in- cur lower agency costs in executive
compensation, engage less in financial reporting irregularities, and
are less likely to be the target of a securities lawsuit. This strong
self-discipline alleviates the risk that rent-seeking managers would
engage in fraudulent activities that endanger the wealth of the
debt holders, or that they would divert assets away from
supporting debt holders’ cash flow. The re- sulting lower
governance risk for debt holders will be priced favor- ably in the
loan terms (Graham et al., 2008; Boubakri and Ghouma 2010; Qi et
al. 2010).
Third, the higher ethical standards associated with religiosity
prescribe less intent for a borrower to break the terms of or to de-
fault on a loan (e.g., Baela et al., 2014). Given the inefficient rene-
gotiation following default and the costly enforcement of loan con-
tracts (Bolton and Scharfstein 1996), lenders are willing to extend
credit on more favorable terms if they know ex ante that the bor-
rower intends to repay.3
We use data from 1994 to 2008 from World Values Surveys
(WVS) to gauge a society’s religiosity. 4 WVS is based on question-
naire interviews with representative national samples in a total of
97 countries (up to 2007), representing almost 90 percent of the
global population. To proxy for a society’s religiosity, we use the
average results of three items in WVS that capture individuals’ in-
volvement in religious services and the importance they assign to
their religious beliefs (see Section 3.1).
To control for the indirect effect that religiosity can exert on the
cost of debt via its influence on legal and political institutions, we
control for country-level creditor rights, legal origin, rule of law,
and political rights in our model. We also include country-level
macroeconomic and banking-sector factors (i.e., GDP per capita,
economic growth, inflation, bank environment, and bank concen-
tration), firm-level factors (i.e., size, leverage, profitability, long-
term assets, Z-score, and cash flow volatility), and loan character-
istics (i.e., amount, maturity, number of covenants, collateral, and
performance pricing) in our model. Using bank loan data from 29
countries, we find evidence that all three dimensions of country-
level religiosity have a significant direct influence on reducing the
cost of debt as measured by loan spread. 5 These results are also
economically significant. For example, a 10-percent change in a
country’s residents belonging to a religious group corresponds to a
difference of 16.78 basis points in the average interest rate of pri-
vate loans. Our evidence also indicates that the effect of religiosity
in reducing the cost of debt is stronger in countries with weaker
creditor rights, likely because weaker creditor protection pro-
vides a stronger demand for religiosity to constrain opportunistic
behavior.
3
Another possible channel for religiosity to reduce the cost of debt is from the
supply side. The traditional view of many religions is to look unfavorably on the
charging of interest on loans (e.g., Stulz and Williamson 2003). This unfavorable
religious belief toward charging interest on loans mitigates bankers’ incentives to
charge higher interest or to profit from the borrower’s disadvantage.
4
http://www.worldvaluessurvey.com/. Recent studies using WVS include Hilary
and Hui (2009) and Giannetti and Yafeh (2012), and Kanagaretnam et al (2014a).
5
Our sample is dominated by U.S. observations and, because of unavailability of
required data, some countries have very few observations. We conduct several ro-
bustness tests to ensure that our results are not driven by the predominance of U.S.
observations in the sample. For example, we find robust results after excluding U.S.
observations.
When considering the effect of religious diversity, we find a sig-
nificant interaction effect between religiosity and religious diver-
sity in reducing the cost of debt. This finding indicates that the
effect of religiosity in reducing the cost of debt is not limited to
certain religions; rather, it suggests that different religions share
the same set of universal values in risk avoidance and high ethi-
cal behavior, which lead to lower cost of debt. Moreover, this find-
ing indicates that a diverse religious environment leads to more
emphasis on these common values. This conclusion is further con-
firmed by evidence that higher religiosity is associated with lower
cost of debt for subsamples of different types of religions.
We also explore the effect of religiosity on other terms of the
loan contract. We find that stronger religiosity is associated with
more favorable contracting terms such as higher facility amount,
adoption of accounting-based performance pricing, and lower up-
front fee.
Given that the results of a cross-country study such as ours
may be confounded by differences in country-level factors, we also
conduct our tests in the homogeneous U.S. economic and cultural
environment using religion data at the county level. We find that
firms from counties with stronger religiosity have lower cost of
debt. We thus provide robust evidence that the results of our
cross-country analysis are unlikely to be driven by other correlated
country-level factors.
We also empirically explore the channel through which religios-
ity reduces the cost of debt. We find that countries with stronger
religiosity also have lower debt default rates. This is consistent
with our argument that the higher risk aversion and ethical stan-
dards associated with stronger religiosity reduce the default rates
and lead to lower interest rates required by banks. In addition,
our evidence indicates that multinational firms tend to issue debt
in countries with higher religiosity, suggesting that companies are
taking advantage of the low debt cost in these countries.
Our results are robust to excluding U.S. observations and obser-
vations during the financial crisis (2007–2008). Our results also are
unchanged after we control for the potential selection bias of bor-
rowing in U.S. dollars and for differences in country-level system-
atic risk. Finally, our results are robust to varying methodologies
that control for country, firm, and year effects.
Our study makes at least three important contributions. First,
we extend the line of research that focuses on the association be-
tween country-level institutions and the cost of debt (e.g., Stulz
and Williamson 2003; Qian and Strahan 2007; Djankov et al. 2007;
and Qi et al. 2010). Our study highlights how a country’s religios-
ity can play a distinct and significant role in reducing a firm’s cost
of debt. Our results suggest that religiosity, an important source of
social norms and values, should be considered as a key country-
level factor along with other country-level institutional factors in
affecting a country’s cost of debt, and thus its growth of capitalism.
Second, we contribute to the emerging literature on the impact of
religiosity on economic activities, an under-studied and yet vitally
important area of economic research (Iannaccone 1998). Extend-
ing previous research which focuses on how religiosity constrains
managerial opportunism and unethical business practices (Hilary
and Hui 2009; McGuire et al. 2012), our study documents both in-
ternationally and domestically that an important economic bene-
fit associated with higher levels of religious belief is lower cost of
debt. We add to the growing evidence on the positive effect of re-
ligiosity on economic development, including how it can reduce
the cost of debt in the absence of strong creditor rights. Third, our
study presents some exploratory evidence on how religious diver-
sity can reduce the cost of debt, and sheds light on the economic
benefits of religious and cultural diversity.
We organize the paper as follows. In the next section, we dis-
cuss the relevant literature and develop our hypothesis. We begin
our formal analysis in Section 3 by detailing the main variables
72 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85
and data sources, the sample selection procedure, and the descrip-
tive statistics. We present the methodology and main results in
Section 4, and the results of additional analyses in Section 5. We
present our conclusions in Section 6.
2. Prior literature and hypothesis development
2.1. Country institutions, religion, and the cost of debt
La Porta et al. (1997, 1998) propose that a country’s credit mar-
ket is shaped by the legal protections afforded to creditors since
stronger legal environments are more conducive to writing and en-
forcing loan contracts.6 Djankov et al. (2007) find that countries
with stronger creditor rights and information-sharing institutions
(i.e., private and public credit registries) enjoy higher ratios of pri-
vate credit to gross domestic product and better credit terms. In
a cross-country setting, Qian and Strahan (2007) demonstrate that
strong creditor protection is associated with lower interest rates
and longer maturities of bank loans. Extending the above finding
to the bond market, Boubakri and Ghouma (2010) document that
strong protection of debt holder rights reduces bond yield-spread
and increases bond ratings. Another strand of literature empha-
sizes the importance of political institutions in financial develop-
ment (e.g., Coffee 2001; Rajan and Zingales 2003; Roe and Siegel
2008) by proposing that the ability of interest groups to bargain
for more favorable policies determines a financial market’s growth.
Qi et al. (2010) find in a sample of 39 countries that both politi-
cal and legal institutions are significant determinants of the cost of
debt.
Religion, as an informal cultural institution, imposes funda-
mental constraints on legal and political institutions (Williamson
2000), and thus can affect the cost of debt indirectly (Weber 1930;
Giannetti and Yafeeh 2012).7 For example, Stulz and Williamson
(2003) find that Protestant countries have a stronger La Porta et
al. creditor rights index, and attribute this finding to the differ-
ent teachings of the Catholic and Protestant faiths, as the former
encourages that private property be used for the good of society.
Research also documents that religion is a major determinant of
political institutions. La Porta et al. (1999) find that countries with
high proportions of Protestants exhibit superior government per-
formance as measured by efficiency of the public sector, public
good provision, government size, and political freedom. Roe and
Siegel (2008) show that religious influences improve government
stability and constrain government corruption.
In sum, despite the large body of research that focuses on the
effects of country-level institutions on corporate financing, to our
best knowledge, no study has examined the direct effect of reli-
giosity on the cost of debt. 8 We aim to fill this gap by providing
evidence on this direct effect in a cross-country setting after con-
trolling for the indirect effect via legal and political institutions.
6
For example, common-law countries (e.g., those with English origin) provide
stronger stipulated legal protections to creditors and also have less legal formal-
ism than civil-law countries (La Porta et al., 1998). This makes it less costly for
creditors in common-law countries to enforce contracts through the legal system,
such as forcing repayments and taking over collateral (Djankov, La Porta, Lopez-
de-Silanes, and Shleifer 2003). In addition, as evidenced by prior literature (e.g.,
Stulz and Williamson 2003; Djankovet al., 2007), some countries’ creditor rights
and political rights were profoundly affected by their colonial history (particularly,
their colonizing countries’ legal origins), whereas their religions were largely intact
and thus can exert a distinct impact on the cost of debt. For example, Stulz and
Williamson (2003) show that, due to their colonial history, non-Christian countries
have a higher creditor rights index than Protestant countries.
7 leads banks to extend less favorable terms to borrowing firms. Since religiosity is
Iannaccone (1998) and Lagace (2001) describe studies on religious values and
economic activities as an uncharted area with great promise in applying economic
models to religion-guided human behavior.
8
Ghoul et al. (2012) find that companies located in areas with stronger religiosity
have lower cost of equity.
2.2. Direct effect of religiosity on cost of bank loans
Due to legal institutions’ inability to entirely constrain oppor-
tunistic behavior through formal legal contracting and enforcement
(e.g., Aggarwal and Goodell 2009), religion, through its influence
on values, norms, and codes of conduct, provides direct guidance
for individuals during market exchange (Zheng et al. 2012).9 We
therefore conjecture that religion can directly affect the cost of
debt through the following channels.
First, religiosity can affect the cost of debt through the reduced
risk exposure of the borrowing firm. Prior studies document a
positive relation between religiosity and individual risk aversion
(Miller and Hoffmann 1995; Osoba 2003; Dehejia et al. 2005; Hi-
lary and Hui 2009; Kanagaretnam et al. 2015a). For example, Osoba
(2003) uses multiple individual choices (e.g., carries medical or
car insurance, smokes, maintains a financial cushion) to capture
the degree of an individual’s risk avoidance and reports that risk-
averse individuals are more likely to attend church. Dehejia et al.
(2005) find that more religious persons have less volatile income
streams.10 Using country-level WVS religiosity data, Kanagaretnam
et al. (2015a) show that banks located in more religious countries
make fewer risky loans and exhibit lower asset return volatility.
Linking individual religiosity to economic activities, Hilary and
Hui (2009) argue that religious individuals’ propensity for risk
aversion will influence their firm’s behavior, because individual re-
ligious values shape corporate culture and members of a corpora-
tion have to conform to their firm’s dominant value. Based on U.S.
data, they find that firms located in more religious areas exhibit
lower levels of volatility in return on equity, consistent with cor-
porate decision making being influenced by individuals’ religiosity.
Prior literature also documents a positive relation between a firm’s
earnings volatility and cost of debt, consistent with banks benefit-
ing from a stable stream of cash flow that can support bond re-
payments (e.g., Graham at al. 2008). We expect that, because
firms in more religious countries have lower levels of earnings
volatility, they will enjoy bank loans with more favorable terms. 11
Second, religiosity can reduce the cost of debt by holding man-
agers to higher ethical standards, thereby reducing the possible
damages to debt holders caused by managerial opportunism. Re-
ligiosity promotes business ethics, especially when one is linked
to a religion and thus guided by the role expectations of that re-
ligion (Zahn 1970; Weaver and Agle 2002; Conroy and Emerson
2004; Longenecker et al. 2004). Consistent with the positive in-
fluence of religiosity on business ethics, recent literature suggests
that religiosity can deter undesirable corporate behavior and con-
strain managerial opportunism (Grullon et al. 2010; McGuire et
al. 2012). Specifically, Grullon et al. (2010) argue that community
9
Specifically, constrained by the bounds on human rationality, human agents are
not able to exhaust all contractually relevant contingencies in contracts and thus
need to be guided directly by social values and norms (Williamson 1998). Coffee
(2001) states that cultures have direct influence on firm behavior; for example, cul-
tural characteristics help explain the low benefits of corporate control in civil-law
Scandinavia.
10
To provide a theoretical explanation for the association between religiosity and
risk aversion, Miller and Hoffmann (1995) and Hilary and Hui (2009) suggest that
risk-averse individuals seek religion in order to reduce the amount of anxiety (fear)
associated with risk and uncertainty in their lives. Using recent data from the World
Values Surveys, Hilary and Hui (2009) find attendance at religious services to be
significantly and positively related to self-reported levels of anxiety at home.
11
In addition, the asset substitution problem (i.e., shareholders substituting a
high-risk project for a low-risk project in order to increase the value of their shares)
associated with less risk exposure and less earnings volatility (Hilary and Hui 2009),
we conjecture that firms in more religious countries face a less severe asset substi-
tution problem and, therefore, obtain more favorable bank loan contracts. In other
words, religiosity helps to mitigate the inherent conflicts of interest between share-
holders and debt holders by reducing risk exposure of the debt holders.
 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85
religious beliefs reflect community values, which, in turn, affect
corporate behavior. They find that managers of firms in areas of
high religiosity in the U.S. are less likely to engage in undesirable
corporate behavior such as backdating stock options and aggres-
sive earnings management, and, consequently, are less likely to be
the target of a securities lawsuit. 12 McGuire et al. (2012) document
that firms located in territories with more religious adherents have
fewer incidences of financial reporting irregularities (measured by
accounting restatements and shareholder lawsuits with allegations
of accounting violations).
International studies also suggest that country-level religios-
ity is associated with ethical standards and can constrain man-
agerial opportunism (Parboteeah et al. 2008; Kanagaretnam, et
al. 2015b). Based on religiosity levels of 44 counties drawn from
WVS, Parboteeah et al. (2008) find that people from countries with
higher levels of religiosity are less likely to justify their ethically
suspected behaviors. Kanagaretnam et al. (2015b) demonstrate that
banks in more religious countries (as indicated by WVS) are less
likely to engage in earnings management to avoid losses or to
meet-or-beat last year’s earnings. They also find that country-level
religiosity is positively associated with bank earnings persistence
and cash flow predictability.
Boubakri and Ghouma (2010) argue that debt holders price the
quality of a borrowing firm’s governance and will rationally require
higher interest rates from firms with more opportunistic manage-
rial behavior.13 For example, financial frauds, such as those at En-
ron, WorldCom, and Xerox, can inflict catastrophic damages to debt
holders and also damage the firm’s disclosure credibility about ex-
pected future cash flows, resulting in a higher cost of debt. Con-
sistent with this reasoning, Graham et al. (2008) show that fi-
nancial restatements are followed by higher interest rates, shorter
maturities, and more covenant restrictions by banks. Given that
religiosity constrains managerial opportunism, we conjecture that
the strong corporate governance associated with religiosity will be
priced favorably by banks and, therefore, will lead to a lower cost
of loans. For example, high religiosity constrains accounting earn-
ings manipulation and reduces the likelihood of costly financial
fraud (Grullon et al. 2010; McGuire et al. 2012), leading to a lower
cost of debt demanded by banks.
Finally, religiosity can reduce the cost of debt because more re-
ligious managers, due to their high business ethics prescribed by
religious norms, are less likely to intentionally violate the terms
of bank loans. There is a universal religious “golden rule” that we
should not do to others as we would wish them not to do to us
(Mintz and Morris 2011). As most religions believe honesty is im-
portant, they prescribe believers to act honestly. Thus taking loans
with dishonest intent does not conform to most religious norms
and would not be in accord with the dominant value of firms
in a religious environment. For example, Baela et al. (2014) show
that Islamic religious norms reduce the default rate of Islamic
loans. In addition, some religions emphasize contractual respon-
sibility. For example, the Puritan faith emphasizes that individu-
als are responsible for fulfilling their freely-entered contacts (Stulz
and Williamson 2003). The above discussion suggests that religios-
ity is associated with the good intention of living up to the terms
of bank loans. Mindful of the inefficiencies and difficulties in rene-
gotiating or enforcing loan contracts, banks will therefore reward
12
In a survey, Longenecker et al. (2004) find more religious business managers
are less accepting of unethical business scenarios such as concealing cash receipts
for income tax purposes.
13
Other literature also empirically shows that measures of corporate governance,
such as disclosure quality, institutional ownership, and board independence, are
negatively related to the cost of debt (e.g., Sengupta 1998; Anderson et al., 2003;
and Bhojraj and Sengupta 2003).
73
well-intended borrowers, such as more religious firms, with more
favorable terms.
Based on the above discussion, we propose the following hy-
pothesis:
H1. Firms in societies with stronger religiosity have a lower cost
of debt.
3. Main variables, data sources, sample, and descriptive
statistics
3.1. Measurement of religiosity
Following prior research (Barro and McCleary 2003; McCleary
and Barro 2006; Roth and Kroll 2007; Eum 2011), we utilize the
religious orientation results from World Values Surveys (WVS) to
measure a society’s religiosity. WVS are conducted by a global net-
work of social scientists interested in examining social values and
their social, political, and economic impacts. From 1981 to 2008,
WVS conducted five surveys (1981–1984, 1989–1993, 1994–1998,
1999–2004, 2005–2008) in a total of 97 societies (20, 42, 52, 67,
and 54 societies for these five surveys, respectively), which rep-
resent almost 90 percent of the global population. 14 The surveys
were conducted on samples representative of each society’s pub-
lic using a standardized questionnaire measuring changing values
on religion, gender roles, work motivations, democracy, good gov-
ernance, etc. Our study utilizes the last three surveys (1994–1998,
1999–2004, and 2005–2008).
We are interested in the part of WVS that “tracks how involved
people are in religious services and how much importance they
attach to their religious beliefs”. 15 Prior literature shows that reli-
giosity is defined by the following three distinct elements: cogni-
tive (knowing), affective (feeling), and behavioral (doing) (Cornwall
et al. 1986; Parboteeah et al. 2008). We use three items in WVS
that capture these three elements of religiosity: member of re-
ligion, religious importance, and religious services. These three
items measure, respectively, the proportion of respondents in each
society who indicate (1) they are affiliated with a religion, (2)
religion is important to them, and (3) they attend religious ser-
vices. Appendix B reports the details for calculating the three dif-
ferent religion elements for each society, and the WVS 2005 code
book provides detailed summary statistics on the different answers
given. In addition, we also extract the first principal component of
these three elements to develop a comprehensive religiosity vari-
able (Religiosity).
3.2. Sample and data sources
Following prior literature (e.g., Qian and Strahan 2007; Gra-
ham et al. 2008; Boubakri and Ghouma 2010; Qi et al., 2010),
we use loan interest spread to proxy for the cost of debt. Specifi-
cally, spread is the all-in-drawn spread of each facility. We obtain
14
“The countries included in these surveys cover the full range from very poor
countries to very rich ones, from authoritarian systems to liberal democracies and
covering all major cultural zones. These surveys provide valuable information about
a crucial component of social change: the values, beliefs and motivations of or-
dinary citizens. This new source of evidence has demonstrated that people’s be-
liefs play a key role in economic development, the emergence and flourishing of
democratic institutions, the rise of gender equality, and the extent to which soci-
eties have effective government.” (page 1 of http://www.worldvaluessurvey.org/wvs/
articles/folder_published/article_base_110/files/WVSbrochure6-2008_11.pdf).
15
See page 11 of http://www.worldvaluessurvey.org/wvs/articles/folder_published/
article_base_110/files/WVSbrochure6-2008_11.pdf. This brochure also notes “The
WVS covers a rising number of countries with Muslim populations. In the most re-
cent wave, about 25 percent of the respondents identified themselves as Muslims.
The WVS will therefore provide a unique opportunity for a deepened understand-
ing of the value profiles of ordinary Muslim men and women from different parts
of the Islamic world.”
74 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85
spread, facility amount, and maturity data for international private
banks for the period 1994–2008 from the Dealscan database. We
use bank loans denominated in either U.S. dollars or local curren-
cies, and convert the local currencies into U.S. dollars based on the
exchange rate provided by Dealscan. We obtain firm-level financial
data from the Compustat Global database. We also obtain country-
level macroeconomic, institutional, and banking-sector factors from
various sources (see Appendix A). Our sample includes 36,147
loan-specific observations from 29 countries (as listed in Table 1)
with all the required religiosity, loan, firm-level, and country-level
data.16
3.3. Descriptive statistics
Table 1, Panel A reports the means of the variables used in our
study by country. The statistics show that Brazil has the highest
score in Member of religion (0.87), Indonesia in Religious importance
(0.98), Thailand in Religious services (0.89), and Philippines in the
comprehensive religiosity measure, Religiosity (1.52). South Korea
has the highest score in Religious Fractionalization (0.67), indicat-
ing a high level of religious diversity in that country. In terms of
sample frequency, a large percentage of sample observations come
from the United States and a few countries (i.e., Thailand, Taiwan,
and Italy) have a very limited number of observations.17 Panel B
of Table 1, which details the distribution of sample observations
by year, shows 1997 as the year with the highest number of ob-
servations (3191). Panel C presents the descriptive statistics for the
regression variables in our study. The means (medians) of Mem-
ber of religion, Religious importance, and Religious services are 0.779
(0.800), 0.792 (0.829), and 0.656 (0.684), respectively. In addition,
across countries, the average All-in-drawn is 173.7 basis points.
Since our study utilizes the last three surveys (1994–1998, 1999–
2004, 2005–2008), we present in Panel D the total number of re-
spondents for these three questions (used in our study) for each
country in the three surveys. The number of respondents is the
same for the three questions.
4. Methodology and empirical results
4.1. Methodology
We estimate the relationship between the cost of debt and re-
ligiosity using the following specification:
All-in-drawn = α + β1Religiosity measures + β2Ln(F acility amount )
+β3Ln(Maturit y) + β4Numbers of covenants
+ β5Secured + β6Per f ormance pricing + β7Ln(Total assets)
+ β8Leverage + β9Return on asset s+β10Tangibilit y
+β11Z-score + β12Cash flow volatility + β13Log(GDP per capita)
+ β14Economic growth + β15In f lation + β16Common law
+ β17Creditor rights+ β18Political rights+ β19Bank environment
16
We begin our sample selection with all available observations with required
data in the DealScan database. Our initial sample consists of 83,108 bank loan ob-
servations spanning 1994 to 2008. We then derive the final sample through the
following steps. First, to increase the comparability of bank loan contracting in our
international debt setting, following Qi et al (2010) and Kim et al (2011), we retain
only those observations with “LIBOR” loan spread. This leads to a loss of 39,707
observations. Second, we drop 443 observations because they have missing religion
variables. Third, we drop 796 observations because of missing loan characteristics
(such as loan size or loan maturity). Last, we exclude 5,041 observations that lack
necessary information for firm-level and country-level controls. Our final sample
consists of 36,147 facility-year observations from 29 countries (as listed in Table 1)
with all the required religiosity, loan, firm-level, and country-level data.
17
Our results are robust to excluding U.S. sample firms and to excluding these
countries with less than two observations.
+ β20Bank concentration + β21Rule of law + β22Uncertainty
avoidance + Industry dummies + Year dummies + εi,t . (1)
Following Edwards (1992), we use country-weighted least
squares regression to control for differential country representation
in the sample. All-in-drawn is the all-in-drawn spread of each facil-
ity. The main variable of interest is Religiosity measures, which rep-
resents the variables Member of religion, Religious importance, Reli-
gious services, and Religiosity.
Drawing on prior studies (e.g., Qian and Strahan 2007; Boubakri
and Ghouma 2010; Qi et al. 2010), we employ three groups
of control variables: loan characteristics, firm characteristics, and
country-level macroeconomic, institutional and banking factors.
Appendix A provides detailed variable definitions. We use the nat-
ural log of the amount of the facility committed by the facility’s
lender pool (Ln (Facility amount)), the natural log of the number
of the months to maturity (Ln (Maturity)), number of covenants
(Number of covenants), whether a loan is secured (Secured), and
whether a loan includes a performance pricing provision (Perfor-
mance pricing), to control for other loan characteristics besides
spread.
We control for firm characteristics, including the natural log of
book value of assets (Ln (Total Assets)), total liabilities scaled by
total assets (Leverage), income before extraordinary items scaled
by total assets (Return on assets), property, plant, and equipment
scaled by total assets (Tangibility), modified Altman (1968) Z-score
(Z-score), and operating cash flow volatility (Cash flow volatility), all
measured at the beginning of the fiscal year.
The country-level macroeconomic factors we include in the re-
gression model are log of real GDP per capita (Log(GDP per capita)),
annual growth of total GDP (Economic growth), and annual percent-
age change of the country Consumer Price Index (Inflation). We use
Common law, an indicator variable that equals one if the coun-
try’s legal origin is common law, and zero otherwise, to control
for a country’s legal origin. Following Djankov et al. (2007) and La
Porta et al. (1998), we use Rule of law to assess the law and order
tradition in the country, scaled from 0 to 10. Higher rule of law
scores means higher tradition for law and order. Further, following
Qian and Strahan (2007) and Qi et al. (2010), we use Creditor rights
to control for legal protection of creditors and Political rights to
control for political institutions. Specifically, Creditor rights ranges
from 0 to 4, with higher values indicating greater legal protec-
tions on creditor rights. Political rights, an index compiled by Free-
dom House, reflects the extent of political rights in a country; it
ranges from 1 to 7, with 7 being the highest political rights. We use
Bank environment to control for a country’s banking environment.
Bank environment is the principal component factor derived from
the following four variables: total assets of development banks as
a share of GDP, total assets of bank-like institutions as a share of
GDP, share of total banking assets of the 3 largest banks, and the
ability of banks to engage in non-banking business. We also con-
trol for Bank concentration, which is the share of total banking as-
sets held by the 3 largest banks in. A few recent studies examine
the impact of culture on debt financing. Zheng et al. (2012) find
that corporate debt maturities tend to be shorter in countries with
national cultures characterized by high uncertainty avoidance, col-
lectivism, power distance, and masculinity. 18 We thus control for a
country’s culture by including the variable Uncertainty avoidance in
our regression. Finally, we use industry and year dummies to con-
trol for industry and year fixed effects. Appendix A provides de-
tailed descriptions of the variables used in the regression.
18
Giannetti and Yafeh (2012) use sharing the same religion as a proxy for cultural
similarity. They find that the extent of cultural differences affects cross-country
bank loans as more cultural distance leads to smaller loans and higher interest
rates.
Table 1
Descriptive statistics.

Panel A: Descriptive statistics by country

Country Member of Religion Religion Religiosity Religious Log(GDP) Economic Inflation Common or Rule of Political Creditor Uncertainty Bank Bank Frequency
religion important services fractionalization growth civil law rights rights avoidance environment concentration

Argentina 0.80 0.69 0.51 1.16 0.24 8.82 -0.01 0.04 0.00 5.35 5.79 1.00 86.00 1.05 0.57 97
Australia 0.51 0.39 0.32 0.71 0.14 10.53 0.13 0.03 1.00 10.00 7.00 1.00 51.00 1.04 0.67 41
Brazil 0.87 0.91 0.73 1.45 0.28 8.65 0.24 0.38 1.00 6.32 5.85 1.00 76.00 1.38 0.68 75
Canada 0.73 0.64 0.54 1.10 0.26 10.30 0.09 0.02 1.00 10.00 7.00 1.00 48.00 1.27 0.58 210
Chile 0.69 0.76 0.52 1.14 0.23 8.64 0.07 0.09 0.00 7.02 6.15 2.00 56.15 1.36 0.49 115
Finland 0.54 0.45 0.31 0.75 0.12 10.15 0.08 0.01 0.00 10.00 7.00 1.00 59.00 0.81 0.87 23
France 0.46 0.41 0.27 0.66 0.26 10.53 0.09 0.02 0.00 8.98 7.00 0.00 86.00 0.83 0.41 12
Germany 0.44 0.29 0.29 0.59 0.18 10.33 0.05 0.02 0.00 9.23 7.00 3.00 65.00 0.77 0.44 44
Hong Kong 0.27 0.27 0.18 0.42 0.63 10.25 0.07 0.02 1.00 8.22 3.00 4.00 29.00 0.83 0.80 45
India 0.73 0.78 0.75 1.31 0.33 6.83 0.17 0.06 1.00 4.17 6.00 4.00 40.00 1.30 0.42 198
Indonesia 0.75 0.98 0.86 1.50 0.62 7.59 0.20 0.09 0.00 3.98 6.00 4.00 48.00 1.49 0.43 7

H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Italy 0.85 0.75 0.78 1.38 0.26 10.39 0.07 0.02 0.00 8.33 7.00 2.00 75.00 1.06 0.36 3
Japan 0.21 0.18 0.52 0.52 0.44 10.48 0.03 0.00 0.00 8.98 7.00 2.00 92.00 2.56 0.21 43
Korea(South) 0.32 0.49 0.54 0.78 0.67 9.85 0.08 0.03 0.00 5.35 6.99 3.00 85.00 1.39 0.33 240
Mexico 0.70 0.84 0.79 1.35 0.24 8.66 0.11 0.12 0.00 5.35 5.48 0.00 82.00 1.32 0.59 172
Netherlands 0.51 0.32 0.29 0.65 0.25 10.65 0.07 0.01 0.00 10.00 7.00 2.00 53.00 0.88 0.73 62
New Zealand 0.45 0.34 0.27 0.61 0.14 10.29 0.15 0.03 1.00 10.00 7.00 3.00 49.00 0.73 0.77 4
Norway 0.45 0.37 0.30 0.64 0.12 10.66 0.06 0.02 0.00 10.00 7.00 2.00 50.00 1.12 0.85 52
Peru 0.81 0.81 0.77 1.38 0.28 7.78 0.03 0.06 0.00 2.50 4.27 0.00 87.00 1.35 0.72 15
Philippines 0.79 0.97 0.87 1.52 0.14 6.99 0.07 0.05 0.00 2.73 6.00 0.00 44.00 0.83 0.47 5
South Africa 0.82 0.91 0.78 1.45 0.33 8.19 0.02 0.06 1.00 4.42 6.80 3.00 49.00 0.88 0.78 81
Spain 0.61 0.51 0.48 0.92 0.21 9.77 0.08 0.03 0.00 7.80 7.00 2.00 86.00 0.85 0.46 49
Sweden 0.34 0.32 0.21 0.50 0.11 10.33 0.05 0.01 0.00 10.00 7.00 2.00 29.00 1.32 0.89 113
Switzerland 0.58 0.45 0.48 0.87 0.16 10.74 0.00 0.01 0.00 10.00 7.00 1.00 58.00 0.58 0.74 52
Taiwan 0.41 0.51 0.33 0.72 0.26 9.74 0.03 0.00 0.00 8.52 6.00 2.00 69.00 0.30 0.44 2
Thailand 0.36 0.94 0.89 1.26 0.14 8.29 0.10 0.05 1.00 6.25 3.00 3.00 64.00 1.09 0.54 1
Turkey 0.75 0.91 0.54 1.27 0.06 8.59 0.14 0.36 0.00 5.18 4.61 2.00 85.00 1.06 0.45 150
USA 0.79 0.81 0.67 1.31 0.26 10.47 0.05 0.03 1.00 10.00 7.00 1.00 46.00 1.53 0.18 33,905
United Kingdom 0.47 0.39 0.33 0.69 0.14 10.63 0.05 0.03 1.00 8.57 7.00 4.00 35.00 0.56 0.58 331

Panel B: Sample distribution by year

Year Freq. Percent Cum.

1994 1859 5.140 5.140

1995 1864 5.160 10.30
1996 2544 7.040 17.34
1997 3191 8.830 26.17
1998 2828 7.820 33.99
1999 2636 7.290 41.28
2000 2589 7.160 48.44
2001 2411 6.670 55.11
2002 2374 6.570 61.68
2003 2320 6.420 68.10
2004 2638 7.300 75.40
2005 2795 7.730 83.13
2006 2527 6.990 90.12
2007 2281 6.310 96.43
2008 1290 3.570 100
Total 36,147 100
(Continued on next page)

75
Table 1
Continued

76
Panel C: Descriptive statistics of regression variables
Variables N Mean Std. P25 Median P75

Member of religion 36,147 0.779 0.067 0.728 0.800 0.820

Religion important 36,147 0.792 0.081 0.737 0.829 0.830
Religion services 36,147 0.656 0.082 0.544 0.684 0.713
Religiosity 36,147 1.286 0.132 1.161 1.336 1.365
Religious fractionalization 36,147 0.264 0.055 0.263 0.263 0.263
TOTRT 32,965 0.524 0.103 0.451 0.544 0.583
All-in-drawn 36,147 173.7 125.6 75.0 150.0 250.0
Ln (facility amount) 36,147 4.750 1.513 3.761 4.836 5.787
Ln (maturity) 36,147 3.669 0.657 3.219 3.892 4.111
Secured 36,147 0.478 0.500 0.000 0.000 1.000
Number of covenants 36,147 4.663 4.373 0.000 4.000 9.000
Performance pricing 36,147 0.468 0.499 0.000 0.000 1.000
Ln (total assets) 36,147 6.634 2.503 5.284 6.721 8.211
Leverage 36,147 0.274 0.229 0.079 0.243 0.411
Return on assets 36,147 0.045 0.093 0.003 0.044 0.093
Tangibility 36,147 0.489 0.399 0.140 0.418 0.779
Z-score 36,147 2.375 2.364 0.747 1.768 3.152
Cash flow volatility 36,147 0.045 0.046 0.015 0.033 0.060

H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Log(GDP) 36,147 10.43 0.30 10.32 10.47 10.60
Economic growth 36,147 0.057 0.017 0.049 0.060 0.065
Inflation 36,147 0.027 0.007 0.023 0.027 0.032
Common law 36,147 0.965 0.183 1.000 1.000 1.000
Bank environment 36,147 1.500 0.134 1.526 1.526 1.526
Bank concentration 36,147 0.206 0.100 0.182 0.182 0.182
Rule of law 36,147 9.838 0.800 10.00 10.00 10.00
Political rights 36,147 6.962 0.281 7.000 7.000 7.000
Creditor rights 36,147 1.069 0.342 1.000 1.000 1.000
Uncertainty avoidance 36,147 46.450 5.048 46.00 46.00 46.00

Panel D: Number of respondents

Country Total number of respondents for religiosity in year 1994–2008

Argentina 3361
Australia 3469
Brazil 2649
Canada 4095
Chile 3200
Finland 2001
France 1001
Germany 4090
Hong Kong 1252
India 6043
Indonesia 3019
Italy 1012
Japan 3512
Korea(South) 3649
Mexico 5459
Netherlands 1050
New Zealand 2155
Norway 2152
Peru 4212
Philippines 2400
South Africa 1500
Spain 3620
Sweden 3027
Switzerland 2453
Taiwan 2007
Thailand 1534
Turkey 6654
USA 3991
United Kingdom 2134

The panel provides the means of institutional characteristics by country. The last column provides the number of facilities based on the largest sample used in the study. Definitions of the variables are shown in Appendix A
and B. The sample period is 1994–2008.
 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85 77

Table 2
Relation between religiosity and loan spread.

(1) (2) (3) (4)

All-in-drawn /100 All-in-drawn /100 All-in-drawn /100 All-in-drawn /100

Panel A: religiosity and all-in-drawn

Member of religion −1.786∗∗∗
(−4.13)
Religion important −1.427∗∗∗
(−3.49)
Religious services −1.067∗∗∗
(−3.23)
Religiosity −0.984∗∗∗
(−4.01)
Ln (Facility amount) −0.150∗∗∗ −0.150∗∗∗ −0.150∗∗∗ −0.150∗∗∗
(−32.78) (−32.78) (−32.78) (−32.78)
Ln (Maturity) 0.198∗∗∗ 0.198∗∗∗ 0.198∗∗∗ 0.198∗∗∗
(24.18) (24.18) (24.18) (24.18)
Number of covenants 0.044∗∗∗ 0.044∗∗∗ 0.044∗∗∗ 0.044∗∗∗
(28.73) (28.73) (28.73) (28.73)
Performance pricing −0.461∗∗∗ −0.461∗∗∗ −0.461∗∗∗ −0.461∗∗∗
(−45.89) (−45.89) (−45.89) (−45.89)
Secured 0.536∗∗∗ 0.536∗∗∗ 0.536∗∗∗ 0.536∗∗∗
(43.79) (43.79) (43.79) (43.79)
Ln (Total assets) −0.077∗∗∗ −0.077∗∗∗ −0.077∗∗∗ −0.077∗∗∗
(−24.02) (−24.02) (−24.02) (−24.02)
Leverage −0.164∗∗∗ −0.164∗∗∗ −0.164∗∗∗ −0.164∗∗∗
(−10.40) (−10.40) (−10.40) (−10.40)
Return on assets 0.549∗∗∗ 0.549∗∗∗ 0.549∗∗∗ 0.549∗∗∗
(22.44) (22.44) (22.44) (22.44)
Tangibility −2.030∗∗∗ −2.030∗∗∗ −2.030∗∗∗ −2.030∗∗∗
(−32.95) (−32.95) (−32.95) (−32.95)
Z-score −0.029∗∗∗ −0.029∗∗∗ −0.029∗∗∗ −0.029∗∗∗
(−11.64) (−11.64) (−11.64) (−11.64)
Cash flow volatility 0.927∗∗∗ 0.927∗∗∗ 0.927∗∗∗ 0.927∗∗∗
(8.52) (8.52) (8.52) (8.52)
Log GDP 0.267∗∗ 0.341∗∗∗ 0.572∗∗∗ 0.339∗∗∗
(2.07) (2.66) (6.16) (2.77)
Economic growth 0.354 0.158 0.228 0.293
(0.58) (0.26) (0.36) (0.47)
Inflation 6.694∗∗ 9.071∗∗∗ 7.400∗∗ 8.043∗∗∗
(2.18) (3.00) (2.42) (2.68)
Common law 0.132∗ 0.0960 0.112 0.164∗∗
(1.70) (1.31) (1.56) (2.19)
Creditor rights −0.737∗∗∗ −0.707∗∗∗ −0.630∗∗∗ −0.715∗∗∗
(−15.33) (−15.66) (−17.63) (−16.25)
Political rights 0.0110 −0.0260 0.0230 −0.0150
(0.35) (−0.83) (0.72) (−0.48)
Bank environment −0.822∗∗∗ −0.732∗∗∗ −0.573∗∗∗ −0.744∗∗∗
(−8.63) (−8.06) (−5.83) (−8.19)
Bank concentration −0.666∗∗∗ −0.774∗∗∗ −0.320∗ −0.707∗∗∗
(−3.24) (−3.22) (−1.77) (−3.27)
Rule of law −0.181∗∗∗ −0.211∗∗∗ −0.278∗∗∗ −0.220∗∗∗
(−4.77) (−5.79) (−7.66) (−6.17)
Uncertainty avoidance −0.016∗∗∗ −0.016∗∗∗ −0.016∗∗∗ −0.016∗∗∗
(−5.52) (−5.52) (−5.52) (−5.52)
Intercept 4.832∗∗∗ 4.215∗∗∗ 1.369 4.346∗∗∗
(3.38) (2.91) (1.51) (3.15)
Industry & year fixed effects Included Included Included Included
Number of observations 36,147 36,147 36,147 36,147
Adjusted R-squared 0.533 0.533 0.533 0.533
(continued on next page)

4.2. Main results
Table 2 presents the estimation results of Eq. (1) relating loan
spread to religiosity. The dependent variable in Panel A is the all-
in-drawn spread divided by 100 and in Panel B it is the natural
log of all-in-drawn spread. The explanatory variable of interest is
Member of religion or Religious importance or Religious services or
Religiosity. In both Panel A and Panel B, the coefficients on all the
religiosity variables are negative and significant at the one percent
level. These results are consistent with our hypothesis that higher
levels of religiosity are associated with lower cost of debt. The re-
sults are also economically significant. For example, based on the
results in column (1) of Panel A, where we measure religiosity by
the percentage of survey respondents that are members of a re-
ligious organization, an increase of 10 percentage points in this
member of religion measure implies a decrease in spread of 17.86
basis points. The control variables generally exhibit signs consis-
tent with prior results.19 For example, consistent with Qian and
Strahan (2007), Boubakri and Ghouma (2010), and Qi et al. (2010),
we that find Creditor rights and Political rights are negatively and
19
These country-level variables may be highly correlated and cause the collinear-
ity issue. We compute the variance-inflation-factor (VIF) when estimating the base-
line regression. We find that the mean VIFs range from 2.81 to 2.88, much lower
than the conventional alarm level of 10. This indicates that the collinearity issue
may not be severe.
78 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Table 2
Continued

(1) (2) (3) (4)

Ln(all-in-drawn) Ln(all-in-drawn) Ln(all-in-drawn) Ln(all-in-drawn)

Panel B: religiosity and Ln (all-in-drawn)

Member of religion −1.786∗∗∗
(−4.13)
Religion important −1.427∗∗∗
(−3.49)
Religious services −1.067∗∗∗
(−3.23)
Religiosity −0.984∗∗∗
(−4.01)
Ln (facility amount) −0.150∗∗∗ −0.150∗∗∗ −0.150∗∗∗ −0.150∗∗∗
(−32.78) (−32.78) (−32.78) (−32.78)
Ln (maturity) 0.198∗∗∗ 0.198∗∗∗ 0.198∗∗∗ 0.198∗∗∗
(24.18) (24.18) (24.18) (24.18)
Number of covenants 0.044∗∗∗ 0.044∗∗∗ 0.044∗∗∗ 0.044∗∗∗
(28.73) (28.73) (28.73) (28.73)
Performance pricing −0.461∗∗∗ −0.461∗∗∗ −0.461∗∗∗ −0.461∗∗∗
(−45.89) (−45.89) (−45.89) (−45.89)
Secured 0.536∗∗∗ 0.536∗∗∗ 0.536∗∗∗ 0.536∗∗∗
(43.79) (43.79) (43.79) (43.79)
Ln (total assets) −0.077∗∗∗ −0.077∗∗∗ −0.077∗∗∗ −0.077∗∗∗
(−24.02) (−24.02) (−24.02) (−24.02)
Leverage −0.164∗∗∗ −0.164∗∗∗ −0.164∗∗∗ −0.164∗∗∗
(−10.40) (−10.40) (−10.40) (−10.40)
Return on assets 0.549∗∗∗ 0.549∗∗∗ 0.549∗∗∗ 0.549∗∗∗
(22.44) (22.44) (22.44) (22.44)
Tangibility −2.030∗∗∗ −2.030∗∗∗ −2.030∗∗∗ −2.030∗∗∗
(−32.95) (−32.95) (−32.95) (−32.95)
Z-score −0.029∗∗∗ −0.029∗∗∗ −0.029∗∗∗ −0.029∗∗∗
(−11.64) (−11.64) (−11.64) (−11.64)
Cash flow volatility 0.927∗∗∗ 0.927∗∗∗ 0.927∗∗∗ 0.927∗∗∗
(8.52) (8.52) (8.52) (8.52)
Log GDP 0.267∗∗ 0.341∗∗∗ 0.572∗∗∗ 0.339∗∗∗
(2.07) (2.66) (6.16) (2.77)
Economic growth 0.354 0.158 0.228 0.293
(0.58) (0.26) (0.36) (0.47)
Inflation 6.694∗∗ 9.071∗∗∗ 7.400∗∗ 8.043∗∗∗
(2.18) (3.00) (2.42) (2.68)
Common law 0.132∗ 0.0960 0.112 0.164∗∗
(1.70) (1.31) (1.56) (2.19)
Creditor rights −0.737∗∗∗ −0.707∗∗∗ −0.630∗∗∗ −0.715∗∗∗
(−15.33) (−15.66) (−17.63) (−16.25)
Political rights 0.0110 −0.0260 0.0230 −0.0150
(0.35) (−0.83) (0.72) (−0.48)
Bank environment −0.822∗∗∗ −0.732∗∗∗ −0.573∗∗∗ −0.744∗∗∗
(−8.63) (−8.06) (−5.83) (−8.19)
Bank concentration −0.666∗∗∗ −0.774∗∗∗ −0.320∗ −0.707∗∗∗
(−3.24) (−3.22) (−1.77) (−3.27)
Rule of law −0.181∗∗∗ −0.211∗∗∗ −0.278∗∗∗ −0.220∗∗∗
(−4.77) (−5.79) (−7.66) (−6.17)
Uncertainty avoidance −0.016∗∗∗ −0.016∗∗∗ −0.016∗∗∗ −0.016∗∗∗
(−5.52) (−5.52) (−5.52) (−5.52)
Intercept 4.832∗∗∗ 4.215∗∗∗ 1.369 4.346∗∗∗
(3.38) (2.91) (1.51) (3.15)
Industry & year fixed effects Included Included Included Included
Number of observations 36,147 36,147 36,147 36,147
Adjusted R-squared 0.533 0.533 0.533 0.533

The dependent variable is all-in-drawn/100. The definitions for the variables are provided in Appendix A. In the parentheses below coefficient estimates are robust t-statistics
based on standard errors adjusted for heteroskedasticity. For brevity, we do not report the coefficient estimates for the industry and year dummies. For each variable, we
report the regression coefficient, followed by the t-statistic in the parentheses. Here, ∗, ∗∗, and ∗∗∗ indicate statistical significance at 10%, 5% and 1% levels, respectively.
The dependent variable is Ln (all-in-drawn). The definitions for the variables are provided in Appendix A. In the parentheses below coefficient estimates are robust t-statistics
based on standard errors adjusted for heteroskedasticity. For brevity, we do not report the coefficient estimates for the industry and year dummies. For each variable, we
report the regression coefficient, followed by the t-statistic in the parentheses. Here, ∗, ∗∗, and ∗∗∗ indicate statistical significance at 10%, 5% and 1% levels, respectively.

significantly related to the cost of debt in both Panels A and B.20

5. Additional analysis
In sum, we find strong evidence that religiosity is negatively re-
lated to the cost of bank loans.
5.1. Religiosity, creditor rights, religious diversity, and cost of debt

20
We find a positive coefficient on Common law, indicating higher cost of debt for
common law countries than for code law countries. This result is consistent with
the findings in prior literature (e.g., Qi et al. 2010; Qian and Strahan 2007, para 4,
p. 2820).
In this section, we first investigate whether the effect of reli-
giosity in reducing the cost of debt is manifested more or less in
countries with stronger creditor rights. As discussed above, when
legal institutions are not able to entirely constrain opportunistic
 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85
behavior through formal legal contracting and enforcement, reli-
gion, through its influence on values, norms, and codes of con-
duct, can provide direct guidance for individuals during market
exchange (Zheng et al. 2012). Countries with weaker creditor pro-
tection are more likely to have legal voids that give rise to op-
portunistic behavior; therefore, we predict that the effect of reli-
giosity in reducing the cost of debt is more pronounced in these
countries.
Next, we examine the effect of religious diversity on the cost of
debt. On the one hand, a diverse religious environment may lead
to different cultures, values, and norms, and may adversely affect
lending cost. For example, Giannetti and Yafeh (2012) argue that
cultural differences make communication less effective and
cooper- ation more difficult. Consistent with this argument, they
find that cultural differences increase the cost of international
lending. On the other hand, major religions may share the same
core set of values, such as risk avoidance and high ethical
standards that can reduce the cost of debt. Moreover, a diverse
religious environment may bring out the best values of each
religion, given the competi- tive market for religious following.
Furthermore, a diverse religious environment may also prevent
religious monopoly and associated authoritarian government,
political instability, corruption, and de- pressed economic
activities, all of which will increase lending cost. We adopt the
religious fractionalization measure from Montalvo and Reynal-
Querol (2005) as the measure of religious diversity, with higher
scores indicating higher diversity of religion.
Table 3 presents the results of testing the interactions between
religiosity, creditor rights, and religious diversity. In Column 1, we
interact Religiosity with Creditor rights, and find a significant pos-
itive coefficient on the interaction term at the one percent level.
Meanwhile, the coefficients on Religiosity and Creditor rights re-
main significantly negative. These results indicate that religiosity
has a stronger (weaker) effect on reducing the cost of bank loans
when a country has weaker (stronger) legal protection of creditors.
Specifically, weaker creditor protection leads to more
opportunities for market participants to behave opportunistically
and thus more need for religiosity to guide the loan contracting
process.
Column 2 presents the results with Religious fractionalization in-
cluded in the regression. We find that the coefficient on Religious
fractionalization is negative but insignificant. Column 3 reports the
interaction results between religiosity and religious diversity as
measured by Religious fractionalization. We find that the coefficient
on the interaction term is significantly negative at the one percent
level, indicating that religious diversity can further lower the cost
of debt beyond that of religiosity. In other words, the effect of re-
ligiosity in reducing the cost of debt is more pronounced when
there are diverse religions in a country.
In sum, the results in Table 3 show that religiosity plays a more
prominent role in the loan contracting process when a country has
weaker legal protection of creditor rights. In addition, the effect of
religiosity in reducing the cost of bank loans is more amplified in
a more diverse religious environment.
5.2. Religiosity and other bank loan items
In this section, we extend our analysis to the effects of religios-
ity on three other bank loan features: facility amount, performance
pricing, and upfront fee. Specifically, we use the following three
dependent variables in Eq. (1), separately: Ln(Facility amount), the
natural log of the actual amount of the facility committed by the
facility’s lender pool, Performance pricing ratio, an indicator variable
that equals one if the loan includes a performance pricing provi-
sion that is based on accounting ratios, and zero otherwise, and
Upfront fee, the one-time fee paid to the lender at the closing of
the deal.
79
Table 4 presents the estimation results for these additional bank
loan items. In Columns 1–2, we find that Religiosity is positively
and significantly related to both Ln(Facility amount) and Perfor-
mance pricing ratio. This indicates that stronger religiosity is as-
sociated with higher facility amount and a higher likelihood of
including performance pricing in the loan contract. Previous re-
search shows that higher financial reporting quality facilitates the
use of the performance pricing provision (Ball, Bushman, and Vas-
vari, 2008; Costello and Wittenberg-Moerman, 2011). Prior religion
studies also find that religion adherence is positively correlated
with financial reporting quality (McGuire et al. 2012; Kanagaret-
nam et al. 2015b). Our results are consistent with stronger reli-
giosity leading to higher accounting quality and a higher likeli-
hood of including performance pricing in a loan contract. In Col-
umn 3, Religiosity has a significantly negative coefficient, indicating
that greater religiosity is associated with lower upfront fee paid to
the lender.
In sum, the results in Table 4 show that religiosity is also as-
sociated with other favorable loan contract terms such as higher
facility amount, using performance pricing, and lower upfront
fee.
5.3. Religiosity and cost of debt: results for the U.S. subsample
Limiting the sample to a single country offers a more homo-
geneous environment than does a cross-country study for estimat-
ing the association between religiosity and the cost of debt. We
therefore test this association within the subsample of U.S. bank
loans. Following Hilary and Hui (2009), Dyreng et al (2010) and
Ghoul et al (2012), we obtain county-level religion data from Reli-
gious Congregations Membership Study, which are available for the
years 1990, 2000, and 2010 through Association of Religion Data
Archives (ARDA). We use TOTRT (Rates of adherence per 1000 pop-
ulation) as the proxy of religiosity, where higher TOTRT indicates
higher religiosity. We then match each bank loan with TOTRT by
the county of the firm’s headquarters. We use TOTRT as the proxy
for religiosity and estimate our main regression (Eq. (1)) for the
U.S. subsample of bank loans. We present the results in Table 5. We
find significantly negative coefficients on TOTRT, indicating that, in
the U.S., regions with stronger religiosity enjoy lower cost of debt.
This result, based on single-country, is free of country-level eco-
nomic, political, and cultural factors that may confound the results
of cross-country studies, and thus offers strong evidence that reli-
giosity reduces the cost of debt.
5.4. Types of religions
We also explore the effect of different types of religions on the
cost of debt. We utilize the questions related to “belong to reli-
gious denomination (v185)” . This question asks respondents “Do
you belong to a religion or religious denomination? If yes, which
one? ” In the answers (WVS 2005 code book page 599), this ques-
tion gives 91 options including most of the religions in the world.
Based on the answers to this question, we classify countries into
one of the following religions: Catholicism (Argentina, Brazil, Chile,
France, Netherlands, Peru, Philippines, Spain, and Switzerland);
Protestantism (Australia, Canada, Finland, Germany, Italy, South
Ko- rea, Mexico, New Zealand, Norway, South Africa, Sweden, USA,
and United Kingdom); Islam (Indonesia and Turkey); Buddhism
(Japan, Taiwan, Thailand, and Hong Kong); and Hinduism (India).
We then estimate our baseline regression separately for each of
the following three religious groupings: (1) Catholicism, (2) Protes-
tantism, and (3) Islam, Buddhism, and Hinduism. We find signifi-
cantly negative coefficients (untabulated) on Religiosity for all three
groups. These results show that after controlling for the type of
religion, higher levels of religiosity are still associated with lower
80 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Table 3
Effect of creditor rights and religious fractionalization on the religiosity-loan spread relation.

(1) (2) (3)

Ln(all-in-drawn) Ln(all-in-drawn) Ln(all-in-drawn)

Religiosity −3.028∗∗∗ −0.402∗∗∗ −0.128

(−6.41) (−4.11) (−0.99)
∗
Religiosity creditor rights 2.746∗∗∗
(5.77)
Religiosity∗ religious fractionalization −1.525∗∗∗
(−3.43)
Ln (facility amount) −0.150∗∗∗ −0.063∗∗∗ −0.063∗∗∗
(−32.77) (−37.51) (−37.31)
Ln (maturity) 0.198∗∗∗ 0.078∗∗∗ 0.078∗∗∗
(24.17) (25.85) (25.68)
Number of covenants 0.044∗∗∗ 0.015∗∗∗ 0.015∗∗∗
(28.73) (28.33) (28.40)
Performance pricing −0.461∗∗∗ −0.146∗∗∗ −0.146∗∗∗
(−45.89) (−40.46) (−40.38)
Secured 0.536∗∗∗ 0.226∗∗∗ 0.227∗∗∗
(43.79) (50.83) (50.90)
Ln (Total assets) −0.077∗∗∗ −0.035∗∗∗ −0.035∗∗∗
(−24.03) (−29.41) (−29.62)
Leverage 0.549∗∗∗ 0.247∗∗∗ 0.249∗∗∗
(22.44) (28.58) (28.78)
Return on assets −2.030∗∗∗ −0.727∗∗∗ −0.727∗∗∗
(−32.95) (−33.49) (−33.52)
Tangibility −0.164∗∗∗ −0.074∗∗∗ −0.074∗∗∗
(−10.40) (−12.93) (−12.90)
Z-score −0.029∗∗∗ −0.009∗∗∗ −0.009∗∗∗
(−11.64) (−9.50) (−9.36)
Cash flow volatility 0.927∗∗∗ 0.368∗∗∗ 0.371∗∗∗
(8.52) (9.39) (9.48)
Log GDP −0.00300 0.152∗∗∗ 0.187∗∗∗
(−0.03) (3.18) (3.73)
Economic growth 0.309 0.0820 0.0650
(0.49) (0.33) (0.26)
Inflation 10.844∗∗∗ 4.873∗∗∗ 4.539∗∗∗
(3.58) (3.92) (3.64)
Common law −0.271∗∗∗ 0.089∗∗ 0.112∗∗∗
(−4.16) (2.45) (2.92)
Creditor rights −1.477∗∗∗ −0.300∗∗∗ −0.287∗∗∗
(−13.50) (−17.37) (−16.15)
Political rights −0.093∗∗∗ 0.00200 0.00600
(−2.83) (0.15) (0.46)
Bank environment −0.734∗∗∗ −0.322∗∗∗ −0.293∗∗∗
(−8.10) (−5.40) (−4.74)
Bank concentration −0.681∗∗∗ −0.260∗∗∗ −0.267∗∗∗
(−3.98) (−2.99) (−3.09)
Rule of law 0.00300 −0.094∗∗∗ −0.113∗∗∗
(0.11) (−5.87) (−6.45)
Uncertainty avoidance −0.016∗∗∗ −0.005∗∗∗ −0.007∗∗∗
(−5.51) (−4.58) (−7.01)
Religious fractionalization −0.0490 1.671∗∗∗
(−0.26) (3.59)
Intercept 6.313∗∗∗ 1.790∗∗∗ 1.302∗∗
(6.57) (3.34) (2.26)
Industry & year fixed effects Included Included Included
Number of observations 36,147 36,147 36,147
Adjusted R-squared 0.533 0.573 0.573

The dependent variable is Ln (all-in-drawn). The definitions for the variables are provided in Appendix A. In the paren-
theses below coefficient estimates are robust t-statistics based on standard errors adjusted for heteroskedasticity. For
brevity, we do not report the coefficient estimates for the industry and year dummies. For each variable, we report the
regression coefficient, followed by the t-statistic in the parentheses. Here, ∗, ∗∗, and ∗∗∗ indicate statistical significance
at 10%, 5% and 1% levels, respectively.

cost of debt and indicate that religiosity can reduce the cost of
debt regardless of the type of religion.
5.5. Religiosity and bank loan default rate
We conject that religiosity reduces the cost of debt because
reli- gious norms hold managers to higher ethical standards and a
lower likelihood of intentional default. We thus explore whether
religios- ity reduces the cost of debt through the intermediate step
of re- ducing the default rate. We calculate the default rate (the
proba-
bility of bankruptcy) based on Shumway (2001). We then regress
default rate on Religiosity and other control variables in Eq. (1) and
find (in untabulated results) that Religiosity is negatively related to
the default rate, suggesting that religiosity can reduce the cost of
debt by reducing the default rate.
5.6. Religiosity and cost of debt: country of debt issuance
If the cost of debt is lower in high-religiosity countries, then
multinational companies would have incentives to issue debt in
 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85 81

Table 4
Relation between religiosity and other bank loan items.

(1) (2) (3)

Facility amount Performance pricing ratio Ln(upfront fee)

Religiosity 1.445∗∗∗ 9.714∗∗∗ −1.711∗∗∗

(3.99) (3.56) (−2.94)
Ln(all-in-drawn) −0.816∗∗∗ 0.911∗∗∗
(−33.78) (9.08)
Ln (facility amount) −0.425∗∗∗ −0.099∗∗∗
(−15.22) (−15.40)
Ln (maturity) 0.220∗∗∗ 0.140∗∗∗
(20.71) (11.09)
Number of covenants 0.036∗∗∗ 0.208∗∗∗ 0.027∗∗∗
(18.36) (24.05) (13.14)
Performance pricing 0.137∗∗∗ −0.206∗∗∗
(9.98) (−14.85)
Secured −0.238∗∗∗ 0.259∗∗∗ 0.489∗∗∗
(−14.27) (4.44) (27.34)
Ln (Total assets) 0.350∗∗∗ −0.305∗∗∗ −0.032∗∗∗
(73.13) (−14.45) (−7.35)
Leverage −0.416∗∗∗ −0.354∗∗∗ −0.129∗∗∗
(−20.37) (−4.26) (−5.71)
Return on assets −0.242∗∗∗ 1.451∗∗∗ 0.318∗∗∗
(−7.51) (10.37) (10.33)
Tangibility 0.548∗∗∗ 3.519∗∗∗ −0.982∗∗∗
(7.29) (10.53) (−13.88)
Z-score −0.084∗∗∗ 0.125∗∗∗ −0.010∗∗∗
(−24.61) (7.75) (−3.10)
Cash flow volatility −2.233∗∗∗ −3.559∗∗∗ 0.544∗∗∗
(−15.04) (−5.57) (3.83)
Log GDP −0.562 −11.723∗ −2.381∗∗
(−0.55) (−1.83) (−2.17)
Economic growth 1.644 16.94 −18.154∗∗∗
(0.32) (0.53) (−3.86)
Inflation 0.111 1.862 −0.195
(0.67) (1.51) (−0.82)
Common law −0.535∗∗∗ −0.719 1.180∗∗∗
(−4.37) (−1.17) (7.25)
Creditor rights −1.612∗∗∗ −0.725 −0.175
(−10.59) (−0.79) (−0.61)
Political rights −0.122 8.112∗∗∗ −0.533
(−0.38) (3.20) (−1.36)
Bank environment 0.241∗∗∗ −0.481 −0.222∗∗∗
(4.50) (−1.10) (−2.58)
Bank concentration −0.459∗∗∗ 2.103∗∗ −0.426∗∗∗
(−7.97) (2.35) (−6.19)
Rule of law −0.0600 0.501 −0.583∗∗∗
(−0.94) (1.06) (−6.93)
Uncertainty avoidance −0.018∗∗∗ −0.0120 −0.013∗∗
(−3.42) (−0.90) (−2.02)
Intercept 18.069∗∗∗ −37.409∗∗ 15.150∗∗∗
(8.91) (−2.42) (5.89)
Industry & year fixed effects Included Included Included
Number of observations 36,147 16,926 7061
Adjusted R-squared 0.522 0.3987 0.487

The dependent variable are Ln (facility amount), performance pricing ratio, and Ln(upfront fee), separately. The definitions
for the variables are provided in Appendix A. In the parentheses below coefficient estimates are robust t-statistics
based on standard errors adjusted for heteroskedasticity. For brevity, we do not report the coefficient estimates for the
industry and year dummies. For each variable, we report the regression coefficient, followed by the t-statistic in the
parentheses. Here, ∗, ∗∗, and ∗∗∗ indicate statistical significance at 10%, 5% and 1% levels, respectively.

these countries. To test this conjecture, we identify 174 bank loan loans in countries with higher religiosity, presumably to take ad-
facilities (78 firms) where a parent company with a subsidiary in vantage of the lower debt cost in these countries.
another country obtains a loan from that country. All these firms
are headquartered in the U.S. We classify all the subsidiaries’ coun-
tries into high vs. low religiosity countries based on the full sam- 6. Robustness tests
ple countries’ median country-level Religiosity of 0.92. In total, we
find that 127 out of these 174 loans are issued in high-religiosity
We conduct a wide array of robustness analyses. In Table 6, we
countries. We also compute the ratio of loans issued in high vs.
present the results of some robustness checks of Eq. (1). First, we
low religiosity countries for each firm. We find (in untabulated
examine the sensitivity of our primary results to variation of the
results) that this ratio is significantly greater than 0.5 (p-value
sample. To address the concern that our results may be driven by
< 0.01). Overall, the evidence suggests that companies issue more U.S. observations that constitute a large majority of our sample, we
82 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Table 5
Relation between religiosity and loan spread in US.
and 0 if is denominated in a local currency. We then use a probit
model to relate US dollar loan to determinants of issuing a loan in
(1) (2)
All-in-drawn /100 Ln (all-in-drawn)
US dollars. We calculate the Inverse Mills Ratio based on the re-
sults of this first-stage regression. In the second stage, we include
TOTRT −0.204∗∗∗ −0.087∗∗∗ the Inverse Mills Ratio in our baseline regression and find that our
(−3.82) (−4.31)
results (untabulated) are still robust.
Ln (facility amount) −0.142∗∗∗ −0.060∗∗∗
(−30.48) (−35.22)
Third, since a firm’s cash flow can be impacted by the country’s
Ln (maturity) 0.183∗∗∗ 0.072∗∗∗ systematic risk, we include the country-level beta in our baseline
(22.02) (23.58) regression. We estimate beta for each country in the sample period
Number of covenants 0.045∗∗∗ 0.016∗∗∗ by regressing daily return on value-weighted market returns. We
(29.20) (28.79)
find that our results are still robust (Column (4)).
Performance pricing −0.464∗∗∗ −0.147∗∗∗
(−45.60) (−40.40) Fourth, we control differences in culture by including the Un-
Secured 0.520∗∗∗ 0.219∗∗∗ certainty Avoidance dimension of culture identified by Hofstede
(41.83) (48.65) (2001) in the model. To further control for the cultural effect,
Ln (total assets) −0.083∗∗∗ −0.037∗∗∗ following Inglehart and Welzel (2005) and Giannetti and Yafeh
(−25.34) (−31.06)
(2012), we use two alternative culture measures: Traditional and
Leverage −0.166∗∗∗ −0.076∗∗∗
(−10.41) (−13.09) Survival. Specifically, Traditional measures the extent to which a
Return on assets 0.554∗∗∗ 0.250∗∗∗ so- ciety emphasizes traditional as opposed to secular values, and
(22.41) (28.66) Sur- vival emphasizes survival as opposed to self-expression.
Tangibility −2.008∗∗∗ −0.716∗∗∗ Traditional
(−32.31) (−32.80)
Z-score −0.030∗∗∗ −0.009∗∗∗
equals 1 if the country falls into the area between [−2, 0] of tradi-
(−12.07) (−10.09) tional values, and 0 otherwise; and Survival equals 1 if the country
Cash flow volatility 0.998∗∗∗ 0.395∗∗∗ falls into the area between [−2, 0] of survival values, and 0 oth-
(8.99) (9.91)
Intercept 1.978∗∗∗ 1.066∗∗∗
erwise. We include these two variables in the baseline regression,
(10.03) (16.30)
which already includes Uncertainty avoidance. We find that the re-
Industry & year & states fixed effects Included Included sults are robust to controlling for these cultural values.
Number of observations 32,965 32,965 Fifth, to control for unobservable country-level characteristics
Adjusted R-squared 0.539 0.581 that may be related to both a firm’s debt default risk and religios-
The dependent variable are All-in-drawn/100,Ln (all-in-drawn), separately. Interest
ity, we include country fixed effects in our regression and find ro-
variable is TOTRT (Rates of adherence per 1000 population) as the proxy of reli- bust results (Column 5). Similarly, since bank loans are issued at
gion. The definitions for the variables are provided in Appendix A. In the paren- the firm level, we also control for firm fixed effects in our regres-
theses below coefficient estimates are robust t-statistics based on standard errors sion and we continue to find robust results (Column 6).
adjusted for heteroskedasticity. For brevity, we do not report the coefficient es-
Sixth, we use two alternative methods to control for potential
timates for the industry and year dummies. For each variable, we report the re-
gression coefficient, followed by the t-statistic in the parentheses. Here, ∗, ∗∗, and
econometric issues caused by overrepresentation of the number of
∗∗∗ indicate statistical significance at 10%, 5% and 1% levels, respectively.
observations by firm, year, and country. These methods include (1)
clustering the standard errors by firm and year, and (2) clustering
the standard errors by country. The results reported in the last two
columns of Table 6 indicate that the main conclusions remain the
re-estimate Eq. (1) after excluding the 33,905 U.S. observations. In same; the coefficients on Religiosity are all significantly negative at
Column 1, we find that the coefficient on Religiosity remains signifi- the one percent level.
cantly negative. Furthermore, this effect of religiosity on the cost of In summary, these sensitivity tests indicate that our main re-
debt continues to be economically significant.21 As a second sam- sults are robust to sample variation and to controlling for firm,
ple variation, we delete observations from the financial crisis pe- year, and country fixed effects.
riod of 2007–2008, to examine whether our results are driven by
the abnormally high cost of debt during this period. Once again, 7. Conclusions
we continue to find (in Column 2) a significantly negative coeffi-
cient on Religiosity. In a third sample variation, to ensure that we Prior research shows that country-level institutional factors can
pick up the effect of religiosity, which tends to be slow moving affect the cost of debt, and these institutional factors can be in-
over time, we limit our sample to only a few years. In Column 3, fluenced by religiosity. We document that religiosity can directly
we find the results to be robust when we limit the sample to years affect the cost of debt because religions provide direct guidance
1994, 2001, and 2008. We also re-estimate our regressions by con- on human behavior when engaging in economic activities. Specifi-
tinent (Europe, America, Asia, Africa, and Oceania) and find that cally, strong religiosity is associated with greater risk aversion and
our results (untabulated) are still robust. higher ethical standards, which reduce default risk and the cost of
Second, we conduct a robustness test to address the selection lending.
bias of using US dollars to issue debt. Our sample includes loans Using data from 29 countries, we find a negative association be-
denominated in both US dollars and local currencies. Because of tween country-level religiosity, as measured by World Values Sur-
the volatility of currency exchange rates, loans issued in local cur- veys, and the interest rate charged on private loans in the coun-
rencies may have a higher default rate. We therefore use a two- try. The results are economically significant with a 10-percentage
stage regression approach to address the potential selection bias of increase in religious membership corresponding to a 17.86 basis
issuing loans in US dollars. In the first stage, we set the indicator point reduction in the average interest rate on private loans in a
variable, US dollar loan, to 1 if a loan is denominated in US dollars, country. We also find that the effect of religiosity in reducing the
cost of debt is more pronounced when countries have weaker le-
21
The impact of a one standard deviation increase in religion (RELIGIOSITY) on gal protection of creditors. This result is consistent with weaker
the cost of debt (All-in-drawn/100) is −2.82%, computed as (−0.372 (coefficient creditor rights providing more room for opportunistic behavior and
on RELIGIOSITY) × 0.132 (the sample standard deviation of RELIGIOSITY)) ÷ 1.737 thus a stronger demand for religiosity to guide the contracting
(the mean of Cost of Debt) = −2.82%. process. Moreover, when examining the effect of religious
diversity on the cost of debt, we find that diverse religious
environments
 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85 83

Table 6
Additional robustness analysis.

Excluding US Dropping the Subsample of Country beta Country fixed Firm fixed Clustering by Clustering by
firms financial crisis 1994, 2001 and effects effects firm and year country
period (2007–2008) 2008

(1) (2) (3) (4) (5) (6) (7) (8)

Ln Ln (all-in-drawn) Ln Ln Ln Ln Ln Ln
(all-in-drawn) (all-in-drawn) (all-in-drawn) (all-in-drawn) (all-in-drawn) (all-in-drawn) (all-in-drawn)

Religiosity −0.372∗∗∗ −0.426∗∗∗ −0.642∗∗ −0.500 −1.262∗∗∗ −0.193∗∗∗ −0.294∗∗ −0.399∗∗

(−3.17) (−3.99) (−2.35) (−3.88) (−3.75) (−2.59) (−2.43) (−2.56)
Bank loan Included Included Included Included Included Included Included Included
characteristics
Firm Included Included Included Included Included Included Included Included
characteristics
County level Included Included Included Included Included Included Included Included
characteristics

Industry fixed Included Included Included Included Included Included Included Included
effects
Year fixed Included Included Included Included Included Included Included Included
effects
Number of 2242 32,576 5560 36,147 36,147 36,147 36,147 36,147
observations
Adjusted 0.521 0.582 0.576 0.574 0.534 0.277 0.560 0.573
R-squared
The dependent variable is Ln (all-in-drawn). The definitions for the variables are provided in Appendix A. In the parentheses below coefficient estimates are robust t-statistics
based on standard errors adjusted for heteroskedasticity. For brevity, we do not report the coefficient estimates for the industry and year dummies. For each variable, we
report the regression coefficient, followed by the t-statistic in the parentheses. Here, ∗, ∗∗, and ∗∗∗ indicate statistical significance at 10%, 5% and 1% levels, respectively.

can interact with religiosity to further reduce the cost of debt.

Furthermore, we document that stronger religiosity is also associ-
ated with other favorable terms in loan contracting such as higher Religious fractionalization The religious fractionalization score of a country.
facility amount, using accounting-based performance pricing, and Higher scores indicate higher diversity of
lower upfront fee. Finally, we show that the effect of religiosity in religion. Sources: Montalvo and Reynal-Querol
reducing the cost of debt holds in the U.S. domestic setting. We (2005)
TOTRT Rates of adherence per 1000 population at county
thus provide strong evidence both internationally and domestically
level. Sources: Religious Congregations
that religiosity is associated with economic benefits in the form of Membership Study.
lower cost of debt. We also conduct several sensitivity tests and Bank loan characteristics
confirm that our results are robust to these alternatives. Ln (facility amount) Natural logarithm of the actual amount of the
To the best of our knowledge, this is the first study to directly facility committed by the facility’s lender pool.
Sources DealScan
link religiosity to the cost of debt at either the international or Ln (maturity) Natural logarithm of the number of the months to
the domestic level. We contribute to the understanding of the eco- maturity. Source: DealScan
nomic effects of religiosity and how religiosity interacts with cred- Secured Indicator variable that equals 1 if the loan has
itor rights in affecting the cost of borrowing. We also find that collaterals, 0 otherwise. Sources: DealScan
Number of covenants Number of covenants, measured by the sum of
religiosity in all types of religions helps reduce the cost of debt
number of general covenants and number of
and religious values can flourish in a diverse religious environ- financial covenants. Sources: DealScan
ment. Our study provides fresh insights into the power of religios- Performance pricing Indictor variable that equals 1 if the loan includes
ity, creditor protection, and diversity in shaping our economic lives. performance pricing provision, 0 otherwise.
Sources: DealScan
Lead bank shares The proportion of lead bank holding in a certain
Appendix A facility. Sources: DealScan
Ln(upfront Fee) Natural logarithm of the one-time fee paid to the
lenders at the closing of the deal. Sources:
DealScan
Performance pricing ratio the probability of accounting-based performance
Variable name Variable definitions and constructions pricing provisions, 0 otherwise. Sources:
All-in-drawn The amount the borrower pays in basis points over DealScan
LIBOR for each dollar drawn down. Source: Firm characteristics
DealScan Ln (total assets) Natural logarithm of the book value of assets at
Religion variables the beginning of the fiscal year. Source:
Member of religion The proportion of respondents who indicate they Compustat Global
are affiliated with a religion based on the WVS. Leverage Total liabilities scaled by total assets, measured at
Source: WVS the beginning of the fiscal year. Source:
Religion important The proportion of respondents who indicate the Compustat Global
religion is important to themselves based on the Return on assets Income before extraordinary items scaled by total
WVS. Source: WVS assets, measured at the beginning of the fiscal
Religion services The proportion of respondents who indicate they year. Source: Compustat Global
attend religious services more than once a year Tangibility Property, Plant, and Equipment (PP&E) scaled by
based on the WVS. Source: WVS total assets, measured in the year prior to
Religiosity Principal component factor derived from the three entering into a loan contract. Sources: Compustat
religion variables: Member of religion, Religion Global
important and Religion services. Source: WVS (continued on next page)
(continued on next page)
84 H. Chen et al. / Journal of Banking and Finance 70 (2016) 70–85

Appendix B
Z-score Modified Altman (1968) Z-score=(1.2 working
capital + 1.4 retained
earnings + 3.3EBIT + 0.999sales)/total assets. We
We compute religion elements in the following steps:
use a modified Z-score, which does not include the
(1) (Cognitive element) V187: Religious person
ratio of market value of equity to book value of total
debt, measured at the beginning of the fiscal year, Member of religion =
because a similar term,
market-to-book, is included in the regressions as a
Respondents who answer “A religious person”
separate variable. Sources: Compustat Global All respondents
Cash flow volatility Cash flow volatility, measured as the standard
deviation of quarterly cash flows from operations
(2) (Affective element). V9: Religion important
divided by total assets over the past five fiscal years. Religion important =
Sources: Compustat Global.
Country characteristics Respondents who answer “Very IM” or “Rather IM”
Log GDP Log of GDP per capita, in constant 2000 US dollars. All respondents
Data from World Development Indicators and Global
Development Finance database. (3) (Behavioral element). V186: How often do you attend reli-
Economic growth Annual growth of total GDP. Sources: International gious services?
Financial Statistics (IFM)
Inflation Average annual percentage change of the country Religion services =
Consumer Price Index over the sample period. Respondents who attended religious services more than once a
Source: International Financial Statistics (IFM) year All respondents
Common law Indicator that equals one if the legal origin is
common law, zero otherwise. Source: La Porta et al.
(1998).
Creditor rights An index reflecting creditor rights. It is formed by
adding (1) when the country imposes restrictions,
such as creditors consent or minimum dividends to
file for reorganization; (2) secured creditors are able to
gain possession of their security once the
reorganization petition has been approved (no
automatic stay); (3) secured creditors are ranked first
in the distribution of the proceeds that result from the
disposition of the assets of a bankrupt firm; and
(4) the debtor does not retain the administration of its
property pending the resolution of the reorganization.
The index ranges from 0 to 4. Sources: Djankov et al.
(2007); La Porta et al. (1998).
Political rights Political rights index from the Freedom House. It
ranges from 1 to 7, with higher values indicating greater
political rights. Source: Freedom House
Bank environment Principal component factor derived from the
following four variables: total assets of development
banks as share of GDP (Devta), total assets of bank like
institutions as share of GDP (Bia), and ability of banks to
engage non-banking activities (Restrict). Source: Beck et
al. (1999).
Banking concentration Share of the assets of 3 largest banks in total
banking assets (Conc).
Power distance Measure of power distance from Hofstede (2001).
Uncertainty avoidance Measure of uncertainty avoidance from Hofstede
(2001).
Rule of law Rule of law refers to the assessment of the law and
order tradition in the country, Scale from 0 to
10. Higher rule of law scores means higher tradition
for law and order. Sources: Djankov et al. (2007); La
Porta et al., (1998).
TOTRT Following Hilary and Hui (2009), Dyreng et al (2010)
and Ghoul et al. (2012), we obtain county-level
religion data from Religious Congregations
Membership Study, which are available for the years
1990, 2000, and 2010 through Association of Religion
Data Archives (ARDA). We use TOTRT (Rates of
adherence per 1000 population) as the proxy of
religiosity, and higher TOTRT indicates higher
religiosity
Corruption index The level of corruption is from Knack and Keefer
(1995) with the scale readjusted to 0 (high level of
corruption) to 10 (low level). The data are averaged
over the period 1982–95. Source: ICRG