The effect of religious piety on managerial entrenchment: evidence from entrenched boards of directors

ABSTRACT

Prior research shows that religious piety is linked to honesty and risk-aversion. Religious piety alleviates the agency conflict by lessening the motivation for managers to exploit shareholders. Because of its role in mitigating the agency conflict, we argue that religious piety influences corporate governance arrangements. We exploit the variation in religious piety across U.S. counties and show that religious piety significantly influences the probability that a firm has an entrenched (staggered) board of directors. In particular, firms located in an area with stronger religious piety are significantly less likely to have a staggered board. This negative effect, however, is significant only when the degree of religiosity is higher than a certain threshold. Further analysis reveals that our results are unlikely confounded by endogeneity. Our results are especially interesting as they demonstrate that non-financial attributes, such as religious piety, has a significant influence on one of the most crucial governance mechanisms, i.e. the board of directors.

JEL CLASSIFICATION:

• G34
• G30

KEYWORDS:

• Religion
• piety
• agency conflict
• staggered boards
• classified boards
• entrenched boards
• agency theory

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Prior studies show that firms located in more religious areas exhibit stronger risk-aversion and more conservative investment policies (Hilary and Hui 2009), less opportunistic timing of option grants (Grullon, Kanatas, and Weston 2010), less earnings management (Grullon, Kanatas, and Weston 2010; McGuire, Omer, and Sharp 2012), fewer class action lawsuits (Grullon, Kanatas, and Weston 2010), fewer financial restatements and financial reporting irregularities (Dyreng, Mayhew, and Williams 2012; McGuire, Omer, and Sharp 2012).

² One issue with this approach is that COMPUSTAT reports only the current state and county of the headquarters. So, the location data do not capture firm relocations. This potential problem, however, is not expected to be severe because relocations are quite rare. To put it in perspective, Pirinsky and Wang (2006) find that only 118 firms relocate in a sample of over 5,000 firms over 15 years (about 2.36%). Moreover, whereas the magnitude of the measurement error might be correlated with some of the dependent variables, it is unlikely that this would be the case for the direction of the measurement error (Hilary and Hui 2009).

³ After 2006, Risk Metrics changed the way governance data were collected. For consistency, we finish our sample period in 2006.