Hometown religiosity and financial reporting quality: evidence from chairpersons

PurposeThis study aims to investigate whether there is a relationship between the religiosity levels of chairpersons' hometowns and the financial reporting quality of companies.Design/methodology/approachUsing a unique hand-collected data set obtained from various sources, the authors use ordinary least squares and logistic regressions to test the hypotheses and further implement various methods to address potential issues such as omitted variables, reverse causality and selection bias problems. In addition, the authors control for the religiosity level of chief executive officers' (CEOs) hometowns. Finally, the authors divide the sample into two subsamples - companies with strong corporate governance and companies with weak corporate governance - to investigate the effect of chairpersons' hometown religiosity on financial reporting quality under strong or weak corporate governance.FindingsThe findings demonstrate that companies with chairpersons from religious hometowns produce high-quality financial reports. Additional tests, such as the Heckman selection model and instrument variable regression, confirm the robustness of the main results. Controlling for the religiosity level of the CEO's hometown yields consistent findings with the main results. Finally, additional results indicate that the religiosity levels of chairpersons' hometowns play a significant role in enhancing financial reporting quality in companies with weak corporate governance.Practical implicationsCompanies should consider appointing board members or chairpersons from more religious hometowns, as the empirical results of this study support the positive effects of chairpersons' hometown religiosity on financial reporting quality.Originality/valueTo the best of the authors' knowledge, the current study is among the first to demonstrate the relationship between the religiosity level of the chairpersons' hometown and the financial reporting quality of companies. The study introduces unique hometown religiosity proxies and controls for various variables related to corporate governance, chairperson attributes, company characteristics, and audit firm characteristics.