Prior research shows that religion promotes honesty. Honesty in turn motivates managers to view an expropriation from shareholders as self-serving, opportunistic and unethical, thereby alleviating the agency conflict. Religious piety is thus expected to discourage agency-driven acquisitions that reduce shareholder wealth. We exploit the variation in religious piety across US counties (and states) and show that firms located in a more religious environment are indeed less likely to make poor acquisitions, measured by the stock market reactions to the acquisition announcement. To draw a causal inference, we use historical religious piety as far back as 1952 as our instrument. The two-stage least squares (2SLS) analysis confirms that religious piety induces firms to make better acquisitions. Our analysis based on propensity score matching also corroborates the conclusion.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics