Exploring the causal effect of religious piety on dividend policy: evidence from historical religious identification

ABSTRACT

Theory suggests that religious piety is associated with greater risk aversion and more conservative financial policies. Returns to shareholders through dividends are much more certain than returns through capital gains expected to be realized far into the future. We hypothesize that religious piety leads to a higher likelihood of dividend payments. We exploit the variation in religious piety across the US counties and estimate the effect of religion on dividend policy. To draw a causal inference, we use historical religious piety in 1971 as the instrument. Our two-stage least squares results confirm that religious piety induces firms to pay larger dividends.

KEYWORDS:

• Dividends
• religion
• religiosity
• payout policy
• instrumental variable

JEL CLASSIFICATION:

• G35
• Z12

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For instance, Stulz and Williamson (2003) find that religion explains cross-sectional variation in creditor rights. Jiang et al. (2015) report that Chinese family firms with religious founders exhibit less risk than other family firms. Adhikari and Agrawal (2016) document that banks headquartered in more religious areas exhibit lower stock return volatility, lower tail risk and lower idiosyncratic risk. Chatjuthamard, Jiraporn, and Tong (2014) report that religious piety has a significant effect on corporate social responsibility. Chintrakarn et al. (2016) find that firms located in more religious areas are less likely to make poor acquisitions. Chintrakarn et al. (2017) report that religiosity substitutes for corporate governance. Firms in more religious areas exhibit weaker governance.

² Hilary and Hui (2009) argue that, to the extent that religious individual cluster in a given geographic location, firms in that location should employ a larger proportion of religious people at different levels of the organization. As a result, the degree to which religious employees, managers in particular, tend to be more risk-averse should be reflected in the firm’s corporate culture and its behaviour.

³ It is particularly worth noting that the effect of religious piety on dividend policy is significant even after controlling for the idiosyncratic risk. Thus, the impact of religious piety is above and beyond its effect on firm risk identified in prior research (Hillary and Hui, 2009).

⁴ Unless otherwise indicated in the table, this is the number of observations in our regression analysis.

⁵ 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 5000 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).

⁶ Many studies use past values of the variable of interest as instrumental variables. Most studies use only one-year lags or n-year lags. Some studies use the value in the earliest year in the sample to maximize the number of lags. Panel data in corporate finance, however, tend to be characterized by a large number of cross-sectional units and a relatively short time period (large N, small T). Thus, using lags in such a setting may not satisfy the exclusion requirement.

⁷ The year 1971 is selected because a survey of religious adherents was conducted in that year. Prior data on religion also exist but was gathered in a different format, making matching with our sample particularly challenging. So, 1971 is the earliest year with usable data on religious piety.

Additional information

Funding

This research is sponsored by The Kanchanapisek Chalermphrakiat Endowment, The Office of Academic Affairs, Chulalongkorn University.