Picking Stocks? Count the Butts in Pews

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Looking to invest your IRA in companies that take few risks while promising steady, if slow, growth? Just count the churches around company headquarters.

That’s the conclusion of two accounting professors in Hong Kong whose recent study reveals that publicly traded companies in the U.S. are less likely to take financial risks — but more likely to grow, albeit slowly — when churchgoing and other measures of religiosity are high within the community where top management is based.

Warren Buffett made headlines in late February commenting on how public companies should manage risk, arguing that CEOs and other top management should be held more accountable when investments fail.

Gilles Hilary and Kai Wai Hui of Hong Kong University of Science & Technology say researchers have long demonstrated the link between religion and an aversion to risky behavior among individuals. Rates of gambling, alcohol abuse and crime, for instance, are lower on average in communities where church attendance and religious affiliation are high.

Their study in a recent Journal of Financial Economics — “The Influence of Corporate Culture on Economic Behavior: Does Religion Matter in Corporate Decision Making in America?” — now shows that religion has a similar effect within for-profit companies by deterring business activities that place corporate assets at risk.

“Religiosity within the larger community affects a company’s investment decisions,” says Hilary, who holds a joint appointment at HEC Paris’ Graduate School of Business. “Management — the individuals who makes these decisions — is not insulated from the external environment.”

Hilary and Hui chose to test their hypothesis in the U.S. because of a relatively homogeneous business climate here and because it ranks among the most devout nations within the developed world, but with wide regional variations. In Mississippi, for instance, 85 percent claimed in a recent Gallup Poll that religion was an important part of their daily lives, compared to 42 percent in Vermont.

“We had to look at a country where religion really matters. It would have been difficult to do this study in, for example, France,” says Hillary.

Using data from the American Religion Data Archive, which collects things like church attendance, religious affiliation, and the number of registered churches, researchers assigned every U.S. county a numerical score to reflect the importance religion plays within the community. Predictably, counties within the Southern Bible Belt states generally scored highest for religiosity; New England counties tended to score lowest, but with plenty of exceptions.

Next, they pored through financial disclosures from a sample of more than 500 publicly traded U.S. companies. In addition to obvious variables like profitability and growth, they tracked exposure to risk (as measured by internal requirements for return on assets and return on investment) and investment behavior (capital outlays and research and development expenditures).

Hilary and Hui compared the financial risk data with religiosity levels within the county where the company is based, on the belief that management philosophy — in any size firm — emanates from corporate headquarters, even when regional offices may be scattered across the globe. As suspected, they found strong correlations between community values toward religion and the degree to which the company exhibits financial risk taking.

Companies based in communities where religion is important report lower risk exposure, higher rates of return on investment on assets, and they invest less in capital and research and development. As a result, they are more likely to eek out a profit and their long-term growth tends to be slow but steady.

Protestantism has a mildly stronger effect on corporate risk behavior than Catholicism. Other, non-Christian religions where not included in the study due to insufficient sample sizes.

The results held strong even after controlling for a host of economic variables such as county labor costs, the local regulatory environment, access to banks; as well as demographic variables — county education levels, political affiliation of residents, alcohol consumption, among others.

The researchers say that statistical tests definitively show that the effect is not a result of financially conservative managers choosing to live in religious communities.

“A change in the religious environment of the firm is likely to cause a change in the behavior of the firm,” the authors conclude.

While Hilary is reluctant to site examples of high-risk or low-risk companies (plenty of geographical anomalies exist), some anecdotal examples support his findings. Of the 12 publicly traded U.S. companies most recently named by the research firm Audit Integrity to its “watch list” of high-risk firms, based on their corporate governance practices and financial transparency, nine are headquartered in states that fall below the national average in Gallup’s religiosity ranking.

A coincidence, perhaps, but Hilary is not opposed to the notion of investment analysts poring over church attendance and other religion data before offering advice. “May sound strange, but as an analyst or investor, it gives you something else, another indicator, you might want to look at,” he says. “If you’re looking for riskier investments you may want to look for companies in highly secular communities.”

The study’s findings also may help firms evaluate proposed mergers and acquisitions.

As management scientists well know, disparate corporate cultures are often blamed when such corporate marriages crumple. A healthy step in the vetting process, Hilary says, may be for managers to consider the importance of religion within the corporate work environment. Culture clashes are defined by more than just dress code — suits and ties versus T-shirts and jeans, says Hilary. “Religion can have a profound effect on the management of a company.”

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