J Bus Ethics (2019) 157:159–182
https://doi.org/10.1007/s10551-017-3701-5
ORIGINAL PAPER
Do Religious Norms Influence Corporate Debt Financing?
Jay Cai1 · Guifeng Shi2
Received: 10 January 2016 / Accepted: 20 September 2017 / Published online: 3 October 2017
© Springer Science+Business Media B.V. 2017
Abstract Previous studies substantiate that religious
social norms influence individual and organizational deci-
sions. Using debt financing settings, we examine whether
a firm’s religious environment influences outside parties’
perceptions in contracting with the firm. We document that
firms located in the more religious areas use less debt financ-
ing and receive better credit ratings. Bond investors require
lower yields and impose fewer covenants on such firms.
Using the 2002 revelation of sex abuse by Catholic priests
as an exogenous shock, we verify that these findings are not
driven by endogeneity issues. Our study highlights the role
of social norms in financial transactions.
Keywords Religiosity · Contracting · Cost of debt ·
Credit ratings · Covenants
JEL Classification G24 · G32 · Z12
Introduction
Many studies in sociology and behavioral science document
the impact that cultural norms have on the decision-making
of individuals in a society.1 In the finance literature, religion
is often used as a proxy for cultural norms (e.g., La Porta
* Jay Cai
jaycai@drexel.edu
Guifeng Shi
shigfeng@sjtu.edu.cn
1
LeBow College of Business, Drexel University, Philadelphia,
PA 19103, USA
2
Antai College of Economics and Management, Shanghai Jiao
Tong University, Shanghai, China
et al. 1999; Stulz and Williamson 2003, among many oth-
ers). Hilary and Hui (2009) argue that the prevailing social
norms, such as religious beliefs, affect not only individual
decisions but also corporate decisions. They document that
companies headquartered in more religious areas tend to
make more conservative investment decisions and have
lower-risk exposures. McGuire et al. (2012) find that firms
headquartered in areas with stronger religious social norms
tend to have fewer financial reporting irregularities. Cal-
len and Fang (2015) document a negative relation between
the religiosity at a firm’s headquarters and its stock price
crash risk. In addition, religion is shown to be associated
with reduced risk taking by fund managers (Shu et al. 2012;
Gao et al. 2015), banks (Adhikari and Agrawal 2016b), and
entrepreneurs (Jiang et al. 2015).
In this study, we examine whether a religious environ-
ment influences a firm’s capital structure and the contract-
ing between shareholders and creditors. Theoretically, local
religiosity may affect a firm’s debt financing and contracts
through three channels. First, debt borrowing is often viewed
in a negative light by religious teaching. In the Bible, finan-
cial debt is described as a form of bondage (Proverb 22:7)
and a curse for disobeying God (Deuteronomy 28:43–45).2
Borrowing beyond one’s means and the subsequent inability
to repay the debt are even deemed “wicked” (Psalm 37:21).
The cancelation of debt in the Jubilee years, however, is
blessed in the Bible (Deuteronomy 15:1–4). Lending is also
described as a blessing from God (Deuteronomy 15:6). In
Islam, any interest-bearing debt is viewed as usury and is
1
See Sect. 2 for a detailed review of the literature.
2
We focus on the Biblical teaching on debt because the religious
population in the USA is made up of primarily Catholics and Prot-
estants.
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prohibited under the Sharia Law. Firms located in more
religious locations are more likely to have managers who
follow such religious teachings and derive negative utility
from the use of debt.3 Consequently, utility maximization
by religious managers may lead to less debt in their capital
structure compared with their less religious peers, all else
being equal. Even if the CEO of a firm is not religious, the
employees, local customers, suppliers, and regulators may
come from a religious community and may find excess debt
undesirable. That is, the religious environment may increase
the non-interest cost of debt in the form of lower employee
morale, less trust from customers and suppliers, more scru-
tiny from regulators, etc. In this case, even the non-religious
CEO may find the optimal course of action involves the use
of less debt. Overall, we predict lower excess leverage ratios
for firms located in counties with higher religiosity ratio.
Second, honesty and integrity are highly valued by reli-
gious communities. One of the most important characteris-
tics of God in the Bible is His faithfulness to His followers.
Numerous Bible verses emphasize the importance of keep-
ing promises.4 Financial debt is a promissory note and not
repaying one’s debt is viewed as “wicked” (Psalm 37:21).
Further, deceitful manipulation of one’s promise is also
condemned (Matthew 5:37). Classic agency theory, how-
ever, may contradict Biblical teaching in that sharehold-
ers, represented by management, may expropriate wealth
from debt holders when a company becomes financially
distressed. Such expropriation typically results in default,
i.e., not paying the full promissory payments of the debt, in
some probabilistic states in the future. A religious CEO may
find such a practice, albeit maximizing shareholder value,
carries a higher personal cost and, therefore, is less likely
to engage in this practice. This may be the case even for a
non-religious CEO of a firm located in a religious commu-
nity who may find default too costly in terms of employee
morale and relationships with customers, suppliers, and
regulators and rationally choose not to expropriate wealth
from debt holders. We, therefore, argue that firms located in
a more religious area have lower agency risk, i.e., the risk of
agency-motivated default is lower for these firms. Viewing
these firms as more trustworthy, debt holders may ration-
ally incorporate the effects of local religiosity on potential
agency risk in bond prices and therefore demand lower yield
3
In Sect. 5.2, we find that firms located in more religious areas are
likely to have more religious CEOs.
4 7
For example, Numbers 30:2 declares that “If a man vows a vow to
the Lord, or swears an oath to bind himself by a pledge, he shall not
break his word. He shall do according to all that proceeds out of his
mouth.” See also Joshua 23:14, Numbers 23:19, Psalm 89:34, Mat-
thew 5:33, 37, 2 Peter 3:9 ESV, among many others.
13
J. Cai, G. Shi
and impose ex ante less restrictive covenants.5 Credit rating
agencies may also give these firms better credit ratings to
account for the lower default risk.
Third, the default aversion of a religious community may
also be manifested in more conservative financing by local
firms. That is, holding interest rate and other capital struc-
ture determinants equal, the more religious firms choose to
take on less risk and borrow less debt.6 Not all debt capital,
however, is risk engendering. We, therefore, focus on the
excess leverage ratios, which take into account various firm
and industry characteristics and are more likely to increase
default risk.7 Further, outside parties may observe more con-
servative investment and financial policies of these firms and
award them with better credit ratings and lower interest rates.
Following prior studies, we measure the religiosity of a
firm as the percent of population who are religious adherents
in the county where the firm’s headquarters is located. We
then empirically examine the following four aspects of a
firm’s capital structure. First, do firms located in more reli-
gious areas use less debt in their capital structure? Second,
do credit rating agencies give better ratings to these firms?
Third, do bond investors require lower yields for bonds
issued by firms located in more religious areas? Finally, do
bond investors impose fewer covenant restrictions on these
firms? The answers to these questions can help us better
understand whether and how social norms in an area may
affect local companies’ capital structure and how firms are
perceived by outside parties. The findings of this study
can also shed light on how social norms affect contracting
between entities.
We first document that companies located in more reli-
gious areas use significantly less excess debt in their capital
structure. An inter-quartile increase in a county’s percentage
religious population is on average associated with around a
5
Gennaioli et al. (2015) argue that investor trust in portfolio man-
agers reduces perceived risk in investments and allows managers to
charge higher fees. Using financial frauds by local firms as an instru-
ment, Parsons et al. (2015) document higher loan spreads and more
restrictive covenants for borrowers perceived as less trustworthy.
6
Less borrowing by the religious firms, however, is not irrational.
By definition, the expected utility of an individual with a higher-level
risk aversion decreases more than that of an individual with lower
risk aversion when the risk of future outcomes increases. If individu-
als can choose the risk level of future outcomes, utility maximiza-
tion leads to the choice of a lower risk level by a more risk-averse
person even if risk taking is rewarded by expected returns. A more
risk-averse manager, therefore, optimally takes a lower level of risk to
maximize her expected utility function.
Two recently published papers examine the relation between reli-
gion and capital structure, but the evidence is inconclusive. Baxam-
usa and Jalal (2014) find that firms located in Catholic-majority coun-
ties have higher leverage, while Baxamusa and Jalal (2016) document
lower leverage for firms with Catholic CEOs.
Do Religious Norms Influence Corporate Debt Financing? 161
1% reduction in the excess leverage ratios of the companies
headquartered in the county. Our finding that more religious
firms exhibit more conservative financing decisions comple-
ments the evidence of Hilary and Hui (2009) that these firms
are more conservative in their investment decisions.
Next, we examine whether firms with higher religios-
ity are perceived more favorably by credit rating agencies
and bond investors. We document that these firms receive
better credit ratings from rating agencies and pay lower
interest rates on their bonds, after controlling for capital
structure and other firm characteristics. An inter-quartile
increase in religiosity ratio is on average associated with
an 8.3 basis point lower bond yield spread (or 4% of the
overall spread) and 12% of one-tier higher credit ratings.
These findings suggest that rating agencies and creditors
view companies located in more religious areas as less
risky. We then document fewer covenant restrictions on
bonds issued by firms located in more religious areas. An
inter-quartile increase in the religiosity ratio is associated
with 4% fewer covenants. This result suggests that bond
investors view more religious firms as more trustworthy.
Note that in the tests of credit ratings, bond yield, and debt
covenants, we control for a firm’s capital structure. These
results, therefore, should be interpreted as the incremen-
tal effects of religiosity beyond more conservative capital
structure decision. Our overall evidence indicates that the
social environment, such as the religiosity, of a firm has
significant influence over the firm’s business transactions
with outside parties.
Readers may question why the religious firms do not
take advantage of the better credit ratings and the lower
bond yields and use more debt in their capital structure.
Part of the explanation may stem from the influence of
religious faith on believers’ preferences, including their
monetary and risk preferences. For example, giving money
to a church appears irrational to a non-religious person and
decreases her utility. Faithful believers, however, often pri-
oritize giving over other expenses. As we discussed above,
religious people tend to be more debt averse and more risk
averse. With such different preference, utility maximization
by a religious individual leads to less borrowing, all else
being equal. Hess (2012) finds that individuals residing in
more religious locations tend to have significantly lower
levels of credit card debt and at the same time significantly
higher credit scores. Since firms located in more religious
counties tend to have more religious managers, utility
maximization by these managers suggests less debt bor-
rowing even if the firms may have better credit ratings and
lower interest rate. In addition, firms located in a religious
environment likely have religious employees, suppliers,
customers, and other stakeholders. Governments of reli-
gious areas also prefer less borrowing (Chen et al. 2016b).
High leverage may reduce the trust of these stakeholders,
which can lead to increased costs in addition to the inter-
est expense.8 Taking these non-interest costs of debt into
account, a firm located in a religious environment may
optimally choose a lower leverage even if its interest cost
alone may be lower. Finally, while firms that take on less
risk are likely to have greater debt capacity, debt capacity
is different from actual utilization of debt. Hillary and Hui
(2009) report that firms located in the more religious loca-
tions invest less. These firms, therefore, may have less need
to use their debt capacity, which results in a lower leverage
in equilibrium.
All four of our tests control for various firm, bond, and
governance characteristics that are known to affect a firm’s
leverage, credit rating, bond yield, and debt covenants, as
well as demographic variables that may correlate with a
county’s religiosity, such as social capital (Hasan et al.
2017), income, education, gender, race, family structure,
population size, and population age. Further, we include
fixed effects of a firm’s incorporation state to control for
the legal institutions governing the firm. The effects of
religion we document, therefore, are net of the effects of
these other factors. Because religiosity may also be cor-
related with county characteristics, the basis from which
religiosity is measured, we further include a county fixed
effect in a robustness test and find qualitatively similar
results.
We use the revelation of the sex abuse of children by
Catholic priests as a natural experiment to provide further
evidence on the endogeneity issues. Most of the abuse cases
happened decades ago and were only uncovered in the early
2000s. The revelation of these abuse cases, therefore, can
be viewed as an exogenous shock to the Catholic popu-
lation of a region, but it is unlikely to be related to other
demographic or social environment variables. We exploit
the cross-diocese variation of the reported prevalence of sex
abuse as an instrument to estimate the predicted Catholic
ratio in 2010. Our main results are similar using the pre-
dicted Catholic ratio. In addition, because the sex abuse vari-
able is unrelated to (the change of) the Protestant ratio, we
use the predicted Protestant ratio in a placebo test and find
no significant results. In addition, we conduct a difference-
in-difference test and find some supporting evidence. The
results from this natural experiment suggest that our main
findings are unlikely to be driven by omitted variables or
reverse causality.
8
For example, religious and risk-averse employees may require a
higher salary to work for a heavily indebted firm. Religious and risk-
averse suppliers may grant less generous trade credit to the same firm,
and customers may be less willing to sign long-term contracts with
the firm. All of these represent additional non-interest cost of debt
that firms located in the more religious areas have to consider.
13
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We conduct a number of additional tests to examine alter-
native interpretations of our findings. First, it is conceivable
that firms located in more religious areas may attract more
religious CEOs. While we document a negative coefficient in
the capital structure regression and a positive coefficient in
the credit ratings regression for CEO religiosity, the magni-
tudes of these coefficients are substantially lower than those
of the local religiosity. This evidence suggests that the cul-
tural influence of religion is more important than top manag-
ers’ personal religious beliefs in the determination of debt
financing transactions.
Second, while companies typically choose their head-
quarters’ locations by proximity to customers, suppliers, and
production rather than the local religiosity, it is conceivable
that firms with a more conservative culture may choose more
religious locations for their headquarters. We address this
potential reverse causality by examining subsamples of firms
that are unlikely to choose the location of their headquarters
based on religiosity. Firms in the manufacturing, mining,
and agricultural industries are more likely to locate their
headquarters close to the physical production and distribu-
tion (Loughran and Schultz 2005 and John et al. 2011), and
larger firms have higher costs to relocate their headquarters
(John et al. 2011). For both types of firms, our main results
are robust.
Additional tests suggest that the documented relation
between religiosity and the debt financing variables are
unlikely to be driven by political conservatism, industry
distribution, corporate governance, or family firms. These
robustness tests help to alleviate the concerns that the rela-
tion between religion and debt financing documented in this
study is driven by omitted variables or reverse causality.
Recently, Hasan et al. (2017) argue that cooperative social
norms help to limit opportunistic behavior and reduce the
agency cost of debt. Using political voting turnout rate and
participation in census as proxies for cooperative social
capital, they document the presence of lower loan/bond
spreads and relaxed non-price terms for firms located in
counties with higher level of social capital. While religios-
ity and cooperative social norms may be related, they appear
to work through different channels and have independent
effects. Specifically, cooperative social norms reduce cost
of debt mainly through limiting opportunistic behavior and
therefore reducing the agency cost of debt. Besides reduc-
ing agency cost, local religiosity also reduces corporate risk
taking and debt utilization through the channels of debt aver-
sion and default aversion. Further, religiosity has a direct
effect on the leverage ratio, while social capital does not.
Hasan et al. (2017) find that the effects of cooperative social
capital are incremental to that of religiosity. Similarly, our
evidence suggests that the effects of religion are also incre-
mental to those of social capital. The combined evidence of
the two papers suggests that social capital and religiosity
13
J. Cai, G. Shi
have independent effects on debt financing and highlights
the importance of cultural factors in corporate decisions and
transactions.
The evidence of this study contributes to the literature
by illustrating the important roles that cultural factors, such
as religion, play in mitigating the potential agency conflicts
between shareholders and bondholders, and consequently,
in the risk assessment, the contracting, and the pricing of
corporate debt. These findings also shed light on how the
social environment of a firm influences its perceived trust-
worthiness among outside investors. In addition, this paper
contributes to the capital structure literature by identifying a
previously undocumented determinant, namely the religious
environment, of firms’ debt financing decisions.
Literature Review and Hypothesis Development
Religion and Corporate Decision‑Making
Cultural factors, such the prevailing religious beliefs of a
society, have a significant influence on individual behavior
and economic outcome.9 Managers and employees of firms
located in more religious areas are likely to be more conserv-
ative and may make more prudent decisions (Terpstra et al.
1993, Miller and Hoffman 1995, Barnett et al. 1996, Miller
2000, and Diaz 2000, among others). Religious influence on
individual behavior may also affect corporate decisions.10 At
the institutional level, Chen et al. (2016b) document lower
debt levels by local governments of the more religious areas.
A number of recent studies in the business literature doc-
ument a positive association between the prevailing religi-
osity of a firm’s environment and its ethical behavior. For
example, Weaver and Agle (2002) and Longenecker et al.
(2004) document that religiosity in a locality influences
the business ethics of the firms headquartered in the area.
Grullon et al. (2010) document that firms headquartered in
more religious locations are less likely to backdate options,
grant excessive executive pay, practice aggressive earnings
management, or become the target of class action securities
lawsuits. Omer et al. (2010) find that auditors located in
areas with stronger religious social norms are more likely
to issue going concern opinions. McGuire et al. (2012) find
9
For examples, see Weber (1905), Iannaccone (1998), Stulz and
Williamson (2003), Kumar et al. (2011), Chen et al (2014) and Adhi-
kari and Agrawal (2016b).
10
For example, religious belief is found to be related to higher
credit scores, lower consumer debt, and few incidents of personal
bankruptcy (Hess 2012), risk taking (Shu et al. 2012), investment
decisions (Anderson, Fedenia, Hirschey, and Skiba, 2011), unethi-
cal business dealings (Liu, 2016), and household financial decisions
(Renneboog and Spaenjers, 2012).
Do Religious Norms Influence Corporate Debt Financing? 163
that firms headquartered in areas with strong religious social
norms tend to have fewer financial reporting irregularities,
which the authors argue is because such norms reduce the
acceptability of unethical business practices. El Ghoul et al.
(2012) find that firms located in more religious counties
tend to have lower cost of equities. Dyreng et al. (2012) find
that firms in areas of high religiosity are less aggressive in
financial reporting, resulting in higher accrual quality, fewer
accounting restatements, lower risk of fraud, and fewer inci-
dents of tax avoidance. Increased ethical behavior of firms
located in more religious areas may help to reduce the poten-
tial agency risk associated with debt financing.
The religiosity of a firm’s environment also influences
corporate conservatism and risk taking. Hilary and Hui
(2009) find that the religiosity at a firm’s headquarters loca-
tion is negatively related to volatilities of stock returns and
returns on assets. The lower risk manifests as both lower
systematic risk and lower idiosyncratic risks. These firms
also invest less in both tangible assets and R&D expen-
ditures and exhibit lower market-to-book ratio.11 Several
recent studies document a negative relationship between
religion and risk taking in other settings. For example,
Gao et al. (2015) find hedge funds located in more reli-
gious counties take less risk. Adhikari and Agrawal (2016b)
document lower risk taking by banks located in more reli-
gious areas. Using Chinese data, Jiang et al. (2015) docu-
ment lower risk taking by firms with religious founders.
Abakah and Kedia (2015) document better credit ratings
and lower yields for municipal bonds issued by states with
fewer Catholics and more Republicans. In an international
study, Kanagaretnam et al. (2015) find that banks located
in more religious countries exhibit lower levels of risk in
their decision-making.
Agency Conflicts, Bond Covenants, and Religion
An important determinant of a firm’s credit risk, and conse-
quently, its cost of debt is the potential conflict between its
creditors and its shareholders (represented by the manage-
ment). Bhojraj and Sengupta (2003) discuss two types of
such conflicts. First, managers may not act in the best inter-
est of the debt holders when a firm is in financial distress.
For example, a firm may increase the risk of the existing
debt by taking on additional financing, paying out a large
dividend, or taking highly risky projects when the market
value of its assets is below its debt obligation, also known as
debt overhang. Second, managers may have adverse private
information about a firm’s default risk but do not disclose
11
To the extent that firm risk is controlled in our empirical tests, the
findings we document are net of the religiosity’s effect on a firm’s
risk taking behavior.
it to potential creditors. Knowing such potential conflicts
can occur, debt investors may impose ex ante restrictive
covenants to mitigate the adverse consequence of agency
conflicts in financial distress. In a recent study, Parsons et al.
(2015) document more restrictive covenants for borrowers
perceived less trustworthy. These restrictive covenants may
also reduce firm value because they also reduce financial
flexibility.
Social norms, such as religion, may be an alternate chan-
nel to mitigating the potential agency conflicts between
shareholders and creditors.12 Myers (1977) argues that “hon-
esty is the best policy” and is an alternative to bond cov-
enants. Most religions value honesty, which may help reduce
information asymmetry between corporate insiders and out-
side investors.13 Several studies discussed in the previous
section show that firms located in more religious areas are
more ethical. As a result, these firms may have lower agency
risk and are awarded with less restrictive bond contracts.
Hypotheses
The debt aversion due to religious teaching and the more
general risk aversion documented for firms headquartered
in the more religious locations predict less use of debt in
these firms’ capital structure. As we discuss previously,
a religious environment adds to the cost of debt beyond
interest expenses. As a result, the equilibrium level of
debt is lower for firms headquartered in the more religious
locations.
H1 Firms headquartered in more religious locations have
lower leverage ratios.
Many studies document that firms located in a more
religious area are more risk averse and are more ethical.
In addition, these firms’ reluctance to use debt reduces the
probability of subsequent debt financing and the consequent
increase in default risk. Taken together, credit rating agen-
cies may view these firms as more creditworthy.
H2 Firms headquartered in more religious locations have
better credit ratings.
Potential debt investors may find the firms located in the
more religious locations more ethical and trustworthy, which
promotes market participation (Guiso et al. 2008) and lowers
the cost of debt for the borrowing firms.
H3 Firms headquartered in more religious locations have
lower cost of debt.
12
For example, Chintrakarn et al. (2017) find a complementary rela-
tion between religion and anti-takeover provisions.
13
For empirical evidence on the relation between religious belief and
ethical behavior, see Conroy and Emerson (2004), Longenecker et al.
(2004), Li (2008), among others.
13
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Finally, the lower agency risk associated with firms
located in the more religious locations may lead to fewer
restrictive covenants in their debt contracts.
H4 Firms headquartered in more religious locations have
fewer bond covenants.
Additional Literature
The literature also suggests that agency conflicts between
creditors and shareholders may also be mitigated by several
other channels including corporate governance, legal, and
political institutions. For example, Li et al. (2014) find that
some governance mechanisms act as substitutes for cove-
nant restrictions. Sengupta (1998) find that better disclosure
improves credit ratings and reduces bond yields. Ashbaugh-
Skaife et al. (2006) find that firms with stronger corporate
governance receive higher credit ratings. Using the passage
of state business combination laws during 1985–1991 as
exogenous shocks, Qiu and Yu (2009) find that anti-takeover
legislation is associated with managerial entrenchment and
higher cost of debt. Cremers et al. (2007), however, docu-
ment that more shareholder control does not necessarily
benefit bondholders.
In addition, legal institutions may help to reduce the cost
of a firm’s external capital. For example, Demirguc-Kunt
and Maksimovic (1999) and Qian and Strahan (2007) docu-
ment that better developed legal institutions are associated
with better bond ratings and lower bond yields for firms in
the jurisdiction. Stronger protection of creditor rights, how-
ever, is not necessarily optimal. Acharya et al. (2011) find
that firms in countries with stronger credit rights tend to
take less risk, which reduces shareholder value. In contrast,
Houston et al. (2010) find that stronger creditor rights are
associated with more risk taking by banks and higher likeli-
hood of financial crisis. Finally, political institutions can also
impact a firm’s cost of debt (Qi et al. 2010). We, therefore,
control for corporate governance, legal, and political institu-
tions in our empirical analysis.
In a contemporaneous study, Chen et al. (2016a) exam-
ine loan data from 41 countries and document lower inter-
est rates and more favorable terms for loans issued in more
religious countries. Their study, however, does not look at
the effect of religion on capital structure, credit rating, cov-
enants, and bond maturity and issuance size. This shortcom-
ing was circumvented in our study, which uses US samples
for all our tests. Our results are therefore not confounded by
potentially omitted country-level factors that could influence
debt financing. In another study, Jiang et al. (2017) find that
firms in more religious counties tend have higher credit rat-
ings and lower cost of debt. Their result on the lower cost of
debt associated with religiosity is more prominent in their
bank loan sample than in their corporate bond sample. In
13
J. Cai, G. Shi
addition to the analyses in their paper, we examine the effect
of religiosity on capital structure and debt covenant, which
provides more direct evidence on how the religious culture
of a firm influences the contracting between shareholders
and creditors. More importantly, both Chen et al. (2016a)
and Jiang et al. (2017) do not attempt to address the endo-
geneity issues while we use a natural experiment to verify
our findings. Finally, we present three theories—negative
religious teaching about debt, more ethical behavior, and
higher risk aversion—to design our tests, which go beyond
both Jiang et al. (2017) and Chen et al. (2016a) that rely
mainly on the prior empirical findings for motivation.
Data
We obtain the religiosity data from American Religion Data
Archive (ARDA),14 which reports the number of religious
adherents of each county in the years of 1990, 2000, and
2010.15 We then calculate for each county the religios-
ity ratio as the number of adherents divided by the total
county population reported by the US Census. For the years
between the three surveys, we linearly interpolate the religi-
osity ratio to obtain an estimate for each year.16
To control for demographic variables, we obtain total
population, male-to-female ratio, minority percentage, per-
centage of married households, average age, education, and
per capita income from the US Census Bureau.17 All demo-
graphic variables, except for income, are also available only
for years 1990, 2000, and 2010. We linearly interpolate these
variables for the years between the available years.18
14
ARDA provides statistics for all religious faiths by county, provid-
ing information on the number of organizations and members. These
data originally appear in Religious Congregations & Membership in
the United States, 2000, published by the Glenmary Research Center.
See details at http://www.thearda.com/Archive/ChCounty.asp.
15
We focus on the number of adherents rather than the number of
members because ARDA indicates that members include only those
who are designated as “full members” by the congregation. Congre-
gational “adherents” include all full members, their children, and oth-
ers who regularly attend services or participate in the congregation.
Using adherents allows for consistency between groups that count
children as members (e.g., Catholics) and those that do not (e.g. Bap-
tists).
16
Hilary and Hui (2009) argue that linear interpolation increases
the power of the tests and provides the opportunity to test time series
properties of religion.
17
To address the possibility that the religiosity ratio may be a proxy
for other demographic variables, we estimate a regression of the
religiosity ratio on other demographic variables and use the residual
as the main independent variable in our analyses. Our results are sim-
ilar.
18
The income data were available up to 2007 when we accessed the
data. We, therefore, use the income data in year 2007 for the three
years afterward.
Do Religious Norms Influence Corporate Debt Financing? 165
Similar to prior studies,19 we examine the religiosity in
a firm’s headquarters location. Pirinsky and Wang (2006)
argue that this approach is “reasonable given that corporate
headquarters are close to corporate core business activities.”
Important corporate decisions are typically made at a cor-
porate headquarters, which is also where most information
exchange between a firm and its investors occurs (Davis and
Henderson 2008). In addition, a firm’s choice of headquar-
ters location is dictated by proximity to customers, suppliers,
and production inputs (El Ghoul et al. 2013) rather than local
religiosity and its potential influence on the cost of debt.
We next match the religion data with four samples of
corporate debt data. Our first sample of capital structure
comes from Compustat during the period of 1990–2010.
We measure a firm’s capital structure with the book (market)
leverage ratio, which equals the total debt divided by the
book (market) value of assets. To capture the risk engender-
ing component of capital structure that is more likely to be
influenced by religious conservatism, we estimate the excess
leverage ratios as the residuals from target leverage regres-
sions.20 Panel A of Table 1 reports that the average firm has
an excess book leverage of − 0.01 and an excess market
leverage ratio of − 0.02.
We next match the county-level religion and demographic
data to firm-level Compustat data by the county where a
firm’s headquarters is located. We exclude firms with miss-
ing total assets and firms that are in the financial industries
(SIC codes of 6000–6999). We also exclude firms with non-
positive book values of equity and negative total liabilities
because these firms have extreme leverage ratios greater than
one or less than zero. To control for the effects of religios-
ity on investment decisions documented in Hilary and Hui
(2009), we require available data on investment rate, Tobin’s
Q, R&D expenses, and standard deviations of stock returns
and ROA. Finally, we require the sample firms to have avail-
able Gompers et al. (2003) Index data (henceforth GIM
index) from RiskMetrics (formerly IRRC) and institutional
ownership data from Thomson Reuters 13F database.21 The
19
See Coval and Moskowitz (1999, 2001), Ivkovic and Weisben-
ner (2005), Loughran and Schultz (2004, 2005), Pirinsky and Wang
(2006), Kang and Kim (2008), and Hilary and Hui (2009), among
others.
20
Following extensive capital structure literature (Antoniou et al.
2008; Kayhan and Titman 2007; Frank and Goyal 2009; Hovakim-
ian et al. 2004; Leary and Roberts 2005; Lemmon et al. (2008), and
Leary and Roberts 2014), we include a firm’s growth opportunity,
profitability, asset tangibility, firm size, R&D, operating leverage,
dividend policy, and non-debt tax shield as well as industry and time-
fixed effects in the target leverage regressions as independent vari-
ables. In a robustness test, we estimate the excess leverage ratios with
the industry median-adjusted leverage ratios. Our findings are similar.
21
The GIM index is available for the years 1990, 1993, 1995, 1998,
2000, 2002, 2004, and 2006 during the sample period. For intermedi-
ate years and the years after 2006, we use the GIM index from the
most recent year.
final sample consists of 18,867 firm/year observations dur-
ing 1990–2010.
Second, we obtain the long-term credit rating data from
Compustat over the time period of 1990–2010. We require
the sample firms to have available data on credit rating,
leverage ratio, GIM index, institutional holdings, and other
firm characteristics. We exclude all financial firms. The
final sample includes 11,274 firm/year observations during
1990–2010. Compustat reports monthly credit ratings rang-
ing from AAA (highest rating) to D/SD (lowest rating—
debt in default). We assign numerical values to each monthly
credit rating, ranging from 21 for AAA to 1 for D/SD, and
use the median value during a fiscal year as the rating for
the year.22 Panel B of Table 1 reports that the average credit
rating of our sample firm is 12.87 or about BBB rating.
In our third sample, we match the religion data with the
bond yields at issuance from SDC, which represents the
return bond investors demand from the borrowing firms.
We focus on US dollar-denominated bonds issued by US
public firms and exclude bonds issued by Fannie Mae, Fred-
die Mac, and other financial firms. We require available data
on bond yield spread, bond rating, GIM index, institutional
holdings, and other bond and firm characteristics. The final
sample consists of 1793 bond issues during 1990–2010.
Panel C of Table 1 reports that the average bond yield spread
is 207 basis points at the time of issuance.
In our fourth sample, we match the religion data with
bond covenant data from the Fixed Income Securities Data-
base (FISD), which provides detailed issue-level informa-
tion on debt securities. We focus on US dollar-denominated
bonds issued by non-financial US public firms. In addition,
we require available data on issuance date, covenants, bond
ratings, GIM index, institutional holdings, and other bond
and firm characteristics variables. Following Billett et al.
(2007), we classify the bond covenants into 15 catego-
ries and create a covenant index that takes one additional
point for the presence of covenants in each of the 15 cat-
egories. The final sample includes 2801 bond issues dur-
ing the period of 1990–2010. Panel D of Table 1 reveals
that the average bond in our sample has a covenant index
of four. We further group the 15 covenant categories into
four major types: subsequent financing covenants, invest-
ment covenants, dividend covenants, and event covenants.
In our sample, the subsequent financing and the investment
covenants appear to be more prevalent than the dividend and
event covenants.
22
The results are similar when we follow Ashbaugh-Skaife et al.
(2006) and classify credit ratings in seven categories: 7 for AAA; 6
for AA +, AA, and AA −; 5 for A +, A, and A −; 4 for BBB +,
BBB, and BBB −; 3 for BB +, BB, and BB −; 2 for B +, B, and B −;
and 1 for CCC + and below. Results are also similar if we use the
average (rather than the median) credit ratings over a fiscal year.
13
166 J. Cai, G. Shi

Table 1  Summary statistics

Panel A: sample of leverage ratios

Variable N Mean SD Median

Religiosity ratio 18,867 0.54 0.11 0.54
Firm Characteristics
Excess book leverage ratio 18,867 − 0.01 0.15 − 0.03
Excess market leverage ratio 18,867 − 0.02 0.12 − 0.03
Return volatility 18,867 0.03 0.01 0.02
ROA volatility 18,867 0.07 0.07 0.04
Institutional ownership (%) 18,867 0.64 0.21 0.66
Herfindahl index of inst’l ownership 18,867 0.07 0.06 0.05
Number of institutional blockholders 18,867 1.98 1.45 2.00
GIM index 18,867 9.06 2.73 9.00
Demographical variables
Social capital 18,867 − 0.68 0.92 − 0.69
Total population (million) 18,867 1.39 1.65 0.89
Male-to-female ratio 18,867 0.96 0.04 0.96
Fraction of minorities 18,867 0.25 0.14 0.24
Fraction of married 18,867 0.19 0.03 0.19
Median Age 18,867 34.92 2.65 34.71
Education 18,867 0.32 0.10 0.30
Per capita income ($ thousand) 18,867 37.69 15.27 34.54
Panel B: sample of credit rating

Variable N Mean SD Median

Religiosity ratio 11,274 0.54 0.11 0.54
Firm Characteristics
Credit rating 11,274 12.87 3.47 13.00
Return volatility 11,274 0.02 0.01 0.02
ROA volatility 11,274 0.05 0.05 0.03
Investment rate 11,274 0.21 0.16 0.17
R&D/sales 11,274 0.02 0.05 0.00
Q 11,274 1.62 0.86 1.34
Book leverage ratio 11,274 0.32 0.17 0.31
ROA 11,274 0.04 0.07 0.04
Negative net income indicator (1/0) 11,274 0.08 0.27 0.00
Interest coverage ratio 11,274 11.54 20.79 5.95
Assets ($billion) 11,274 9.06 29.32 2.77
Subordinated bond indicator (1/0) 11,274 0.16 0.37 0.00
PPE/Assets 11,274 0.40 0.24 0.36
Institutional ownership (%) 11,274 0.62 0.21 0.65
Herfindahl index of inst’l ownership 11,274 0.06 0.05 0.04
Number of institutional blockholders 11,274 1.69 1.40 2.00
GIM index 11,274 9.55 2.66 10.00
Demographical variables
Social capital 11,274 − 0.63 0.95 − 0.58
Total population (million) 11,274 1.34 1.56 0.86
Male-to-female ratio 11,274 0.95 0.04 0.95
Fraction of minorities 11,274 0.26 0.14 0.25
Fraction of married 11,274 0.18 0.03 0.19
Median Age 11,274 34.83 2.61 34.52
Education 11,274 0.31 0.10 0.28

13
Do Religious Norms Influence Corporate Debt Financing? 167

Table 1  (continued)
Panel B: sample of credit rating
Per capita income ($ thousand) 11,274 37.13 15.74 33.69
Panel C: sample of bond yields

Variable N Mean SD Median

Religiosity ratio 1793 0.53 0.10 0.53
Bond Characteristics
Yield spread (basis points) 1793 206.92 177.02 145.80
Log (yield spread) 1793 5.00 0.87 4.98
Bond rating 1793 13.92 3.13 14.00
Floating bond (1/0) 1793 0.05 0.22 0.00
Callable bonds (1/0) 1793 0.66 0.47 1.00
Putable bonds (1/0) 1793 0.02 0.15 0.00
Firm characteristics
Return volatility 1793 0.02 0.01 0.02
ROA volatility 1793 0.04 0.03 0.03
Investment rate 1793 0.21 0.14 0.18
R&D/sales 1793 0.02 0.04 0.00
Q 1793 1.81 0.93 1.53
Book leverage ratio 1793 0.32 0.14 0.30
Assets ($ billion) 1793 20.40 38.64 8.90
ROA 1793 0.06 0.06 0.06
Institutional ownership (%) 1793 0.67 0.16 0.69
Herfindahl index of inst’l ownership 1793 0.04 0.04 0.04
Number of institutional blockholders 1793 1.57 1.30 1.00
GIM index 1793 9.68 2.63 10.00
Demographic variables
Social capital 1793 − 0.37 0.87 − 0.31
Total population (million) 1793 1.37 1.57 0.89
Male-to-female ratio 1793 0.95 0.04 0.96
Fraction of minorities 1793 0.28 0.14 0.27
Fraction of married 1793 0.18 0.03 0.18
Median Age 1793 35.40 2.70 35.29
Education 1793 0.33 0.10 0.30
Per capita income ($ thousands) 1793 42.47 16.45 38.71
Panel D: sample of bond covenants

Variable N Mean SD Median

Religiosity ratio 2801 0.54 0.10 0.54
Covenant variables
Covenant Index 2801 3.92 2.70 4.00
Subsequent financing covenants 2801 1.37 1.02 2.00
Investment covenants 2801 1.44 0.92 2.00
Dividend covenants 2801 0.33 0.71 0.00
Event covenants 2801 0.78 0.84 1.00
Bond Characteristics
Bond rating 2801 12.66 3.75 13.00
Private placement (1/0) 2801 0.20 0.40 0.00
Maturity (year) 2801 12.17 11.15 10.00
Offering amount ($ millions) 2801 325.44 289.37 250.00
Callable bond (1/0) 2801 0.70 0.46 1.00

13
168 J. Cai, G. Shi

Table 1  (continued)
Panel D: sample of bond covenants

Putable bond (1/0) 2801 0.02 0.14 0.00

Firm Characteristics
Return volatility 2801 0.02 0.01 0.02
ROA volatility 2801 0.05 0.05 0.03
Investment rate 2801 0.21 0.16 0.18
R&D/Sales 2801 0.01 0.03 0.00
Q 2801 1.60 0.84 1.33
Book leverage ratio 2801 0.36 0.17 0.34
Assets ($ billions) 2801 11.14 20.49 4.45
ROA 2801 0.04 0.06 0.04
PPE/Assets 2801 0.74 0.39 0.71
Institutional ownership (%) 2801 0.64 0.18 0.65
Herfindahl index of inst’l ownership 2801 0.05 0.06 0.04
Number of institutional blockholders 2801 1.60 1.38 1.00
GIM index 2801 9.58 2.65 10.00
Demographic variables
Social capital 2801 − 0.65 0.91 − 0.56
Total population (million) 2801 1.33 1.44 0.86
Male-to-female ratio 2801 0.95 0.04 0.95
Fraction of minorities 2801 0.27 0.14 0.26
Fraction of married 2801 0.18 0.03 0.18
Median Age 2801 34.67 2.58 34.38
Education 2801 0.30 0.10 0.27
Per capita income ($ thousands) 2801 36.58 14.17 33.70

This table presents the summary statistics for our four samples: the excess leverage ratio sample in Panel A, the credit rating sample in Panel B,
the bond yield sample in Panel C, and the bond covenant sample in Panel D. Variables in Panels A and B are based on the firm/year observa-
tions. Variables in Panels C and D are based on bond issues. Leverage ratios, ROA, interest coverage, and PPE/assets ratio are Winsorized 1 and
99%. See Appendix for variable definitions

Main Empirical Findings
We examine in this section whether firms located in the more
religious areas are more conservative in their capital structure
decisions and whether they are perceived more trustworthy
by outside parties and, consequently, are rewarded with lower
cost of financing and more flexible financing terms.
Religiosity and Capital Structure
We estimate regressions of the excess leverage ratios on
local religiosity and control variables of risk and corporate
governance. In addition, we include the following demo-
graphic variables to control for the socioeconomic environ-
ment of a firm’s headquarters: social capital, population,
income, education, gender, minority population, marital
status, and age. Since all firms in the same county have the
same religiosity ratio in the same year, we correct standard
errors for clustering at the county and year levels.23
23
Our results are also robust to clustering at the firm level.
Columns (1) and (2) of Table 2 report the results of the
OLS regressions of the excess book and market leverage
ratios, respectively. The coefficient of the religiosity ratio
equals − 0.063 and − 0.052, respectively, and both fig-
ures are statistically significant at the 1% level. This result
suggests that firms located in more religious locations use
significantly less risky debt in their capital structure. The
evidence is also economically meaningful. For example, an
inter-quartile increase in the religiosity ratio (0.16) is on
average associated with a 1% (− 0.063 × 0.16) reduction in
the excess book leverage ratio or a 0.83% (− 0.052 × 0.16)
reduction in the excess market leverage ratio. For com-
parison, the standard deviations of excess book leverage
ratio and excess market leverage ratio are 15% and 12%,
respectively.
Religiosity and Credit Rating
We next examine the relation between the religious tendency
at a firm’s headquarters location and the credit rating of the
firm. The dependent variable is the S&P long-term domestic

13
Do Religious Norms Influence Corporate Debt Financing? 169

Table 2  Religion and excess capital structure negative earnings, R&D expenses, Tobin’s Q, and the stand-
Dependent variable =
ard deviations of ROA and stock returns. Ability to repay
debt is controlled for with interest coverage ratio; available
Excess book leverage Excess market lever-
collateral assets are controlled for with the PPE-to-assets
age
ratio; and investment risk is controlled for with investment
Independent variables (1) (2) rate. We also control for the legal environment of a firm with
Intercept 0.249** (2.222) 0.175* (1.877) the firm’s state of incorporation fixed effects and control for
Religiosity ratio − 0.063*** (− 4.979) − 0.052*** (− 4.797) a firm’s corporate governance with the GIM index, insti-
StdRet 1.252*** (8.803) 1.861*** (14.326) tutional ownership, and the number of institutional block-
StdRoa − 0.071*** (− 3.280) − 0.144*** (− 8.251) holders.25 Since multiple firms may have headquarters in the
Institutional owner- 0.006 (0.717) − 0.045*** (− 6.131) same county and consequently have the same values for the
ship religiosity and demographic variables, we correct standard
Herfindahl index of 0.119*** (5.096) 0.156*** (7.141) errors for clustering at the county and year levels. Column
institutional owner-
ship (1) of Table 3 reports that in the OLS regression the coef-
Number of block- 0.003*** (2.829) 0.008*** (9.582) ficient of the religiosity ratio equals 0.771 and is statistically
holders significant at the 1% level.
GIM index 0.004*** (8.922) 0.003*** (8.777) This coefficient suggests that for an inter-quartile increase
Social capital 0.003 (1.274) 0.001 (0.531) of 15% in the religious adherents in the county where a
Log total population 0.007*** (4.842) 0.004*** (3.368) firm’s headquarters is located, the credit rating of the firm
Male-to-female ratio − 0.340*** (− 7.147) − 0.254*** (− 6.316) increases by 12% (0.77 × 0.15 = 0.12) of a rating tier.26
Minority (%) − 0.031** (− 2.242) − 0.025** (− 2.132) While the absolute magnitude of religion’s effect on credit
Married (%) 0.271*** (3.293) 0.179*** (2.596) rating may be relatively small, this effect is obtained after
Age 0.000 (0.564) 0.000 (0.594) controlling for various firm characteristics that are com-
Education 0.006 (0.194) 0.027 (1.053) monly used by rating agencies to evaluate the creditworthi-
Log per capita − 0.006 (− 0.586) − 0.006 (− 0.707) ness of a company, such as capital structure, profitability,
income and ability to repay debt.
N 18,867 18,867 Because of the ordinal nature of the dependent variable,
Adjusted or Pseudo 0.073 0.104 credit rating, we also estimate an ordered logistic regression
R2 in Column (2). The coefficient of the religiosity ratio is also
The sample consists of 18,867 firm/year observations during the positive and statistically significant at the 1% level. The posi-
period of 1990–2010. The dependent variable is either the excess tive and significant coefficient of the religiosity variable in
book leverage ratio or the excess market leverage ratio. All variables both specifications indicates that social norms are related to
are defined in the Appendix. All regression specifications include
the perceived riskiness of a firm.
industry, year, and incorporation state fixed effects (unreported).
Standard errors are robust to clustering at the county and year levels;
t-statistics are in parentheses Religiosity and Cost of Debt
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% lev-
els, respectively The results in the previous section illustrate that the firms
located in more religious areas tend to receive better credit
ratings from credit rating agencies. In this section, we inves-
issuer credit rating, which ranges from 21 for AAA rating tigate whether these firms are also viewed more favorably by
and 1 for firms in default. The key independent variable is bond investors. Specifically, we examine whether the bonds
the religiosity ratio in the county where a firm’s headquar- of these firms are priced at a lower yield spread. Our sample
ters is located. We control for capital structure by including includes 1793 bond issues during the period of 1990–2010
the book leverage ratio in all regression models as an inde- from SDC.
pendent variable.24 The coefficient of the religiosity ratio,
therefore, indicates the association between religiosity and 25
We do not control for board characteristics in our main results
credit rating net of the religiosity’s effect on capital structure because nearly half of our sample firms are not available from the
documented in the previous section. In addition, we con- RiskMetrics Director database. In a sensitivity test for those firms
trol for a firm’s profitability with ROA and an indicator of with available board data, we control for board size, board independ-
ence, and the CEO-Chairman duality. Our main results are similar.
24 26
In unreported robustness tests, we include the market leverage In comparison, the coefficient of social capital equals 0.276 and is
ratio as well as indicator variables of whether a leverage ratio is statistically significant at the 1% level. For an inter-quartile increase
above or below the sample median, respectively, as control for capital of 1.39 in social capital, the credit rating of the firm increases by 38%
structure. All our results are similar. (0.276 × 1.39) of a rating tier.

13
170 J. Cai, G. Shi

Table 3  Religion and credit Dependent variable = credit rating

rating
OLS Ordered logistic regressions

Independent variables (1) (2)

Intercept 3.354 (0.933)
Religiosity ratio 0.771*** (3.556) 0.677*** (3.057)
Return volatility − 87.988*** (− 30.185) − 96.771*** (− 29.701)
ROA volatility − 8.161*** (− 14.262) − 8.898*** (− 14.018)
Investment rate − 0.708*** (− 4.741) − 0.610*** (− 4.006)
R&D/sales − 1.100* (− 1.934) − 1.273** (− 2.080)
Q 0.856*** (25.699) 0.830*** (23.009)
Book leverage ratio − 4.274*** (− 27.119) − 4.428*** (− 27.018)
ROA 3.323*** (7.878) 4.569*** (9.740)
Negative net income indicator (1/0) − 0.636*** (− 6.831) − 0.851*** (− 7.783)
Interest coverage ratio − 0.001 (− 0.480) − 0.001 (− 1.026)
Log (total assets) 0.812*** (40.754) 0.828*** (38.318)
Subordinated bond indicator (1/0) − 0.814*** (− 16.420) − 0.817*** (− 15.480)
PPE/Assets 0.697*** (5.815) 0.796*** (6.510)
Institutional ownership − 0.248 (− 1.450) − 0.178 (− 1.098)
Herfindahl index of institutional ownership − 0.935 (− 1.350) − 1.727*** (− 2.663)
Number of blockholders − 0.168*** (− 8.816) − 0.148*** (− 8.058)
GIM index 0.052*** (6.978) 0.044*** (6.003)
Social capital 0.276*** (6.451) 0.257*** (5.987)
Log total population 0.009 (0.301) 0.005 (0.165)
Male-to-female ratio − 3.315*** (− 4.272) − 3.560*** (− 4.499)
Minority (%) 0.889*** (3.505) 0.779*** (3.151)
Married (%) 8.313*** (5.988) 7.992*** (5.885)
Age − 0.061*** (− 4.835) − 0.058*** (− 4.536)
Education − 2.001*** (− 3.983) − 2.255*** (− 4.501)
Log per capita income 0.303* (1.835) 0.368** (2.237)
N 11,274 11,274
Adjusted or pseudo R2 0.733 0.252

The sample consists of 11,274 firm/year observations during the period of 1990–2010. The dependent vari-
able is credit rating. All variables are defined in the Appendix. Models (1) reports the results from OLS
regressions, and models (2) reports the results from ordered logistic regressions. All regression specifica-
tions include industry, year, and incorporation state fixed effects (unreported). Standard errors are robust to
clustering at the county and year levels; t-statistics are in parentheses
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

Column (1) in Panel A of Table 4 presents the regression
results where the dependent variable is the natural logarithm
of the yield spread, which is the difference between the yield
of the bond and the yield of a US treasury security with the
same duration at the time of issuance. The key independent
variable is the religiosity ratio at the county where a firm’s
headquarters is located. We include a number of firm and
bond characteristics and demographic variables along with
industry, year, and incorporation state fixed effects as con-
trols. Credit rating is by far the most important determinant
of the yield spread of a bond. As shown in the previous
section, the religiosity at a firm’s headquarters location has
a significant effect on credit rating. To examine the overall
religiosity effect on bond yield spread, we first estimate a
regression of credit ratings on local religiosity and all other
right-hand side variables and then use the residual credit
rating in the yield spread regression similar to Klock et al.
(2005).
Column (1) reports a coefficient of − 0.44 for the religios-
ity variable, which is statistically significant at the 5% level.
Using the inter-quartile range of 13% for the religiosity ratio
and the average log yield spread of 5.00 in our sample, we
estimate that an inter-quartile increase of the religious ten-
dency at a firm’s headquarters location is associated with
an average decrease of 8.3 basis points (­ e5.0–0.44 × 0.13–e5.0)
in the firm’s yield spread. This represents a 4% reduction in
the cost of debt given that the average bond in our sample
has a yield spread of 207 basis points. The findings of this

13
Do Religious Norms Influence Corporate Debt Financing? 171

Table 4  Religion, cost of debt, and bond covenants

Panel A: main results
Dependent variable =
log (yield spread) Log (1 + covenant index) Covenant index

Independent variables and statistics OLS OLS Ordered logistic regression

(1) (2) (3)
Intercept 6.336*** (4.215) 2.394*** (2.682)
Religiosity ratio − 0.443** (− 2.426) − 0.256** (− 2.263) − 1.050* (− 1.845)
Residual of credit rating − 0.124*** (− 17.385) − 0.023*** (− 4.521) − 0.234*** (− 8.914)
Private placement (1/0) − 1.697*** (− 62.897) − 8.540*** (− 25.397)
Log (maturity) − 0.003 (− 0.179) 0.021 (0.328)
Log (offering amount) 0.098*** (6.814) 0.394*** (5.339)
Floating bond (1/0) − 0.390*** (− 5.137)
Callable (1/0) 0.073** (2.331) 0.098*** (3.623) 0.428*** (3.617)
Putable (1/0) − 0.256** (− 2.316) − 0.065 (− 0.896) 0.025 (0.090)
Return volatility 16.255*** (10.647) − 1.047 (− 0.806) − 2.107 (− 0.359)
ROA volatility 2.617*** (6.563) 0.021 (0.096) 0.623 (0.553)
Investment rate 0.025 (0.282) 0.097 (1.483) 0.807** (2.556)
R&D/sales 0.137 (0.297) 0.575 (1.309) 3.063* (1.700)
Q − 0.231*** (− 10.876) − 0.020 (− 1.330) − 0.219*** (− 2.989)
Book leverage ratio 0.477*** (4.851) 0.022 (0.330) 0.493 (1.407)
Log (Total assets) − 0.161*** (− 11.517) − 0.102*** (− 7.811) − 0.596*** (− 9.813)
ROA − 1.131*** (− 4.339) − 0.046 (− 0.202) − 0.030 (− 0.031)
PPE/Assets − 0.065* (− 1.698) − 0.302 (− 1.607)
Institutional ownership 0.056 (0.510) 0.135* (1.872) 0.287 (0.817)
Herfindahl index of institutional ownership 0.721*** (2.916) 0.198 (1.120) 0.566 (0.580)
Number of blockholders 0.050*** (4.119) − 0.003 (− 0.368) 0.038 (0.882)
GIM index − 0.004 (− 0.654) − 0.003 (− 0.714) − 0.047** (− 2.382)
Social capital 0.034 (1.302) − 0.001 (− 0.064) 0.014 (0.147)
Log total population 0.026 (1.141) 0.005 (0.318) − 0.034 (− 0.429)
Male-to-female ratio 0.798 (1.573) 0.329 (0.801) 3.722* (1.806)
Minority (%) − 0.406** (− 2.393) − 0.102 (− 0.742) − 0.455 (− 0.660)
Married (%) − 2.999*** (− 3.086) − 1.055 (− 1.485) − 5.077 (− 1.430)
Age 0.006 (0.687) 0.010 (1.613) 0.032 (1.025)
Education 0.320 (0.901) 0.397* (1.696) 0.003 (0.003)
Log per capita income − 0.100 (− 0.789) − 0.172** (− 2.081) − 0.302 (− 0.715)
N 1793 2801 2801
Adj. R2 0.713 0.713 0.277
Panel B: types of covenants
Dependent variable = indicator (1/0) of the presence of
Subsequent financing covenants Investment covenants Dividend covenants Event covenants

Independent variables (1) (2) (3) (4)

Religiosity ratio − 0.311*** (− 3.588) − 0.212** (− 2.526) 0.152* (1.916) − 0.136 (− 1.245)
Control variables Included Included Included Included
N 2801 2801 2801 2801
Pseudo R2 0.610 0.589 0.468 0.441

This table reports the regression results of the association among religion, cost of debt, and bond covenants. The sample in Column (1) of Panel
A consists of 1793 bonds issued from SDC during the period of 1990–2010. The dependent variable is the natural logarithm of yield spread.
The sample in Column (2) and (3) of Panel A consists of 2801 bond issuances with covenant data available from FISD during the period of
1990–2010. Following Billett et al. (2007), we group the covenants into 15 categories and construct a covenant indicator variable for each cate-

13
172 J. Cai, G. Shi

Table 4  (continued)
gory. We then calculate the covenant index as the sum of the 15 indicator variables. In Panel B, we further group the 15 covenant categories into
four main types: subsequent financing covenants, investment covenants, dividend covenants, and event covenants. The dependent variable is an
indicator variable that equals one if a bond has a certain type of covenants and zero otherwise. All regressions in Panel B, therefore, are logistic
regressions. All variables are defined in the Appendix. All regression specifications include industry, year, and incorporation state fixed effects
(unreported). Standard errors are robust to clustering at the county and year levels; t-statistics are in parentheses
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

section suggest that firms located in more religious locations
are perceived more favorably by bond investors, resulting
in lower cost of financing for these firms. This result sug-
gests that more religious firms should use more debt in their
capital structure if these firms have the same risk preference
as the less religious firms. Our earlier finding that the more
religious firms have lower excess leverage ratios, however,
indicates that these firms are more risk averse and make
more prudent financing decisions.
Religiosity and Bond Covenants
In this section, we further investigate whether bond inves-
tors are willing to give these firms more contractual flexibil-
ity, an indication of investor trust. Specifically, we examine
the relation between the number of bond covenants and the
religiosity at the issuing firms’ headquarters in a sample of
2801 bond issues during 1990–2010.
In Columns (2) and (3) in Panel A of Table 4, the depend-
ent variable is either the log covenant index in the OLS
regressions or the ordinal covenant index in the ordered
logistic regressions. The key independent variable is the
religiosity ratio at the county where the issuing firm’s head-
quarters is located. We also include a number of firm and
bond characteristics and demographic variables along with
industry, year, and incorporation state fixed effects as control
variables. Similar to the bond yield regressions, we control
for the residual credit rating unrelated to the religiosity ratio
and the other right-hand side variables.
In Column (2) of Table 4, Panel A reports a coefficient of
− 0.26 for the religiosity variable, which is statistically sig-
nificant at the 5% level. This result suggests that after con-
trolling for firm and bond characteristics, investors impose
fewer restrictions on the bonds issued by companies located
in more religious areas. Using the inter-quartile range of
14% for the religiosity ratio and the average log covenant
index of 1.37, we estimate that an inter-quartile increase in
the religious tendency at a company’s headquarters location
is associated with a 3.6% (­ e1.37–0.26 × 0.14 ÷ e1.37–1 = 0.036)
reduction in the number of bond covenants for an average
bond in our sample. This result suggests that bond investors
tend to have more trust in firms located in more religious
areas. This evidence also provides new insight into how
social norms influence contracting between shareholders
and creditors.
Because of the ordinal nature of the covenant index, we
also employ an ordered logistics regression specification for
this variable. Column (3) reports a coefficient of − 1.05 for
the religiosity ratio, which is statistically significant at the
10% level.
We next follow Billett et al. (2007) and group the 15 cov-
enant categories into four major types—subsequent financ-
ing covenants, investment covenants, dividend covenants,
and event covenants—and examine how religiosity influ-
ences each type of covenants. Subsequent financing cov-
enants typically prevent firms from moving to overly risky
capital structure and increasing the risk of existing debt.
Since we show that firms located in more religious areas
tend to use a more conservative capital structure, bond inves-
tors may see less need to impose covenant restrictions on
the future financing activities of these firms. We, therefore,
expect firms with higher religiosity ratios to face fewer sub-
sequent financing covenants. Investment covenants typically
restrict firms from making risky investments or disposing of
proceeds from asset sales. Hilary and Hui (2009) show that
the firms with higher religiosity ratios tend to make more
conservative investment decisions. Bond investors, there-
fore, may find it also less necessary to impose investment
restrictions on these firms. Dividend covenants, however,
are designed to mitigate the under-investment problem by
limiting the amount of cash firms can return to shareholders
(Myers 1977 and Billett et al. 2007). Because firms located
in more religious areas tend to have lower investment rates
and growth (Hilary and Hui 2009), bond investors may find
it advisable to impose dividend restrictions on these firms.
Similar to Chava et al. (2010), for each of the four cov-
enant types, we define an indicator variable that equals one
if a bond has at least one covenant of the given type and
zero otherwise. We then estimate logistic regressions for
the four covenant type indicator variables, where the main
independent variable is the religiosity ratio. The results are
reported in Panel B of Table 4. Consistent with our pre-
diction, for the subsequent financing covenants, Column
(1) reports a coefficient of − 0.31 for the religiosity ratio,
which is statistically significant at the 1% level. For the
investment covenants, Column (2) reports a coefficient of
− 0.21, which is statistically significant at the 5% level. For
dividend covenants, Column (3), however, reports a positive
and significant coefficient for the religiosity ratio. This result
is consistent with our expectation that more religious firms

13
Do Religious Norms Influence Corporate Debt Financing? 173
tend to invest less and may have a greater need for dividend
covenants to prevent under-investment. Finally, we find no
significant relation between religiosity and event covenants
in Column (4). The differential effects of the religiosity at a
firm’s headquarters location on its bond covenants provide a
richer illustration of how social norms may influence a firm’s
contracting with outside parties.
Additional Tests
In the previous sections, we document a significant relation
between the religious social norm at a firm’s headquarters
location and the firm’s capital structure, credit rating, cost
of debt, and bond covenants. We interpret these results as
evidence that social norms can influence corporate decisions
as well as how a company is viewed by outside parties and
its transaction with outside parties. Nevertheless, there could
be alternative interpretations for these results as we address
in this section.
By definition, the religiosity ratio is calculated geographi-
cally. It is possible that religiosity is correlated with other
demographic and social environment factors, which affect
our findings. In addition, a firm located in a more religious
area may attract a more religious CEO, who makes more
conservative debt financing decisions. Further, a more con-
servative firm may choose a more religious location for its
headquarters. To address these endogeneity issues, we per-
form the following tests.
A natural Experiment
In January 2002, a series of Boston Globe reports on the
widespread sexual abuse of children by scores of priests in
the Boston Archdiocese and the subsequent cover-up by the
Catholic Church shocked the nation. Many additional abuse
cases surfaced across the USA in the subsequent months.
Most of the abuse cases, however, happened decades ago
and were only uncovered in the early 2000s. The revelation
of these abuse cases, therefore, can be viewed as an exog-
enous shock to the Catholic population of a region, but is
unlikely to be related to other demographic or social envi-
ronment variables. In addition, this shock should have no
effect on the Protestant population. We, therefore, use the
reported prevalence of sexual abuse by priests in a diocese as
an instrument to predict the change in the Catholic religios-
ity ratio in the counties located in the diocese from 2000 to
2010. Specifically, we measure the prevalence of abuse in a
diocese with the percent of priests accused of sexual abuse
using data from http://www.bishop-accountability.org. Panel
A of Table 5 reports a significant and negative coefficient for
this abuse variable in the regression of the change in Catho-
lic ratio. That is, the percentage Catholic population declines
more in the areas where the reported priest abuse of chil-
dren is more prevalent. In contrast, we find no correlation
between the change in Protestant ratio and the prevalence of
sexual abuse by Catholic priests in an area.
We next calculated the predicted Catholic (Protestant)
ratio in 2010 as the sum of the predicted changes from the
first-stage regressions and the respective ratio in 2000.
These predicted religiosity ratios in 2010 are then used as
the main independent variables in the debt financing regres-
sions.27 While this approach is not the standard instrument
variable procedure, this test is designed to contrast the two
main components of the religiosity ratio, the Catholic ratio
and the Protestant ratio, when one of them experiences an
exogenous shock.
Specifically, for the leverage and credit rating regressions,
we use the cross section of firms with available data in 2010.
For the cost of debt and covenant tests, we use the bond
issuances during 2003–2010. Panel B of Table 5 reports
the results. In all five regressions, the predicted Catholic
ratio has the same sign as the religiosity ratio in the base-
line regressions in Tables 2, 3, 4. Further, this variable is
statistically significant in four out of the five regressions.
This result demonstrates that an exogenous shock to the
religiosity of a region can meaningfully influence the capital
structure, credit rating, cost of debt, and covenants of firms
located in the region.
In contrast, the predicted Protestant ratio consists of
largely random noise and is statistically nonsignificant in all
five regressions as would be expected since the exogenous
shock has little impact on the Protestant faith. This evidence
serves as a placebo test to further validate our main findings.
Next, we perform a difference-in-difference test using the
2002 revelation of the sex scandals. Specifically, we define
the Treatment variable to be one if a diocese’s Catholic
dominance, estimated as the Catholic ratio divided by the
religiosity ratio, is above median and the percent of accused
priests is above median among all dioceses, and zero if both
the Catholic dominance and the percent of accused priests
of a diocese are below median. Post indicator equals one for
the years after 2002, and zero otherwise. The key variable
of interest is the interaction term between Treatment and
Post, which measures the incremental effect of the shock on
debt financing variables netting out both diocese-specific
effects and time trend. Panel C of Table 5 reports a positive
coefficient of 1.8% for the interaction term in both the excess
market and book leverage ratio regressions, which suggests
an average 1.8% reduction in the leverage ratios for firms
27
One may argue that the religiosity ratios in 2000 are correlated
with those in 2010 and consequently may drive the results in Panel B
of Table 5. The nonsignificant coefficients of the predicted Protestant
ratio in 2010, however, suggest that this interpretation is unlikely to
be the case.
13
174 J. Cai, G. Shi

Table 5  A natural experiment

Panel A: first-stage regression
Independent variables and statistics Change in Catholic ratio from 2000 to 2010 Change in Protestant
ratio from 2000 to
2010

Percent of Catholic priests in a diocese − 0.187*** (− 2.59) 0.058 (0.75)

accused of sex abuse
N 1963 2068
Adj. R2 0.0029 − 0.0002
Panel B: second-stage regressions
Dependent variable =
Independent variables and Excess book leverage Excess market leverage Credit rating log (yield spread) log (1 + covenant index)
statistics

(1) (2) (3) (4) (5)

Predicted Catholic ratio in − 0.245*** (− 2.61) − 1.444 (− 1.56) 2.062* (1.80) − 0.509** (− 2.02) − 0.330* (− 1.69)
2010
Predicted Protestant ratio in − 0.184 (− 1.55) − 0.091 (− 0.99) − 0.199 (− 0.12) − 0.174 (− 0.58) 0.332 (1.10)
2010
Control variables Included Included Included Included Included
N 447 447 313 1100 930
Adj. R2 0.427 0.676 0.619 0.766 0.764
Panel C: difference-in-difference test
Dependent variable =
Independent variables Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
and statistics

(1) (2) (3) (4) (5)

Treat − 0.064*** (− 6.683) − 0.041*** (− 5.305) 0.628*** (3.728) 0.009 (0.081) − 0.162** (− 2.240)
Post − 0.014 (− 1.233) 0.001 (0.149) − 0.562*** (− 3.076) − 0.110 (− 1.240) 0.084 (1.210)
Treat* post 0.018 (1.438) 0.018* (1.788) − 0.333* (− 1.670) − 0.031 (− 0.292) − 0.036 (− 0.459)
Median of protestant − 0.139*** (− 4.210) − 0.074*** (− 2.793) 2.407*** (4.205) 0.436 (1.041) − 0.209 (− 0.801)
ratio
Median of control vari- Included Included Included Included Included
ables
N 1014 1014 1011 340 454
Adj. ­R2 0.138 0.090 0.626 0.662 0.577

This table reports the results of a two-stage regression procedure and the difference-in-difference regressions. Panel A reports the results of the
first-stage regressions, where we use the percent of accused Catholic priests in a diocese to predict the changes of Catholic ratio and Protestant
ratio in a county from 2000 to 2010. We then calculate the predicted Catholic (Protestant) ratio in 2010 as the sum of the Catholic (Protestant)
ratio in 2000 and the predicted change from the first-stage regression. In Panel B, we use these predicted Catholic and Protestant ratios as the
main explanatory variables in the second-stage regression. Control variables in Panel B are the same as those reported in Tables 2, 3, 4 but are
not tabulated for brevity. Panel C reports the results of the difference-in-difference regressions. Treatment indicator equals one if a diocese’s
Catholic dominance, estimated as the Catholic ratio divided by the religiosity ratio, is above median and the percent of accused priests is above
median among all dioceses, and zero if both the Catholic dominance and the percent of accused priests of a diocese are below median. Post
indicator equals one for the years after 2002, and zero otherwise. The regressions are estimated at the diocese level, and all firm- or county-level
variables take median value of all firms or counties in the diocese. All variables are defined in the Appendix. Standard errors are robust to clus-
tering at county and year levels; t-statistics are in parentheses
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

located in dioceses more affected by the scandals when com- magnitude of this effect, nevertheless, is substantial because
pared with firms located in less affected dioceses. The coeffi- the average firm in our sample has a book leverage ratio of
cient is statistically significant in the market leverage regres- 15% and market leverage ratio of 12%. Further, the interac-
sion but not in the book leverage regressions. The economic tion term has a coefficient of -0.333, which is significant at

13
Do Religious Norms Influence Corporate Debt Financing? 175

Table 6  Local religiosity and CEO religiosity

Dependent variable =
Independent variables and Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
statistics

(1) (2) (3) (4) (5)

Religiosity ratio of firm − 0.022 (− 1.017) − 0.029* (− 1.716) 1.745*** (4.991) − 0.300 (− 1.432) − 0.316* (− 1.910)
headquarter
Religiosity ratio of CEO’s − 0.046*** (− 3.383) − 0.048*** (− 4.531) 0.540** (2.483) − 0.026 (− 0.211) 0.000 (− 0.001)
college
Control variables Included Included Included Included Included
N 7563 7563 4734 1150 1318
Adj. R2 0.105 0.116 0.730 0.741 0.748

This table presents the OLS coefficients of the local religiosity ratio at a firm’s headquarter and the religiosity ratio at the CEO’s college campus
for regressions in Tables 2, 3, 4. We identify the college where a CEO received her undergraduate education from BoardEx. We then use the
religiosity of the county where the college is located to measure CEO religiosity. Control variables are included in all regressions but are not
tabulated for brevity. Standard errors are robust to clustering at county and year levels; t-statistics are in parentheses
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

the 1% level in the credit ratings regression. This coefficient
suggests an average credit downgrade of one-third of a tier
for firms located in the dioceses more affected by the sex
abuse scandals than those located in the less affect dioceses.
The interaction term, however, is not significant in the bond
yield and debt covenant regressions.
Taken together, the evidence presented in Table 5 helps to
alleviate the concerns about potential endogeneity.
CEO Religiosity
Hilary and Hui (2009) find that CEOs tend to move between
firms with similar religiosity ratios, which suggest a positive
association between a CEO’s religious beliefs and the local
religiosity at the firm headquarters. We, therefore, exam-
ine whether CEO religiosity also influences a firm’s capital
structure and subsumes the effect of local religiosity. Since
we cannot directly observe the religious beliefs of a CEO,
we follow Shu et al. (2012) and measure CEOs’ religious
beliefs with the religiosity ratio of the county where she
received her undergraduate degree. Shu et al. (2012) argue
that “a person with certain religious belief is likely to choose
a school where the culture is consistent with the religious
beliefs of herself, her family, or her hometown.” In addi-
tion, the (lack of) religious culture at the school location
also influences one’s beliefs. For a subset of our samples
where we can identify the CEO’s undergraduate college in
BoardEx, we collect the religiosity ratio at the location of
the college as the CEO religiosity ratio. The CEO religiosity
ratio and the firm religiosity ratio have a correlation of 0.14,
which is statistically significant at the 1% level. This positive
and significant correlation between CEO religiosity and firm
religiosity is consistent with the evidence of Hilary and Hui
(2009) and Shu et al. (2012).
Table 6 reveals that the CEO religiosity has a negative
and significant coefficient in the leverage regressions and a
positive and significant coefficient in the credit rating regres-
sion. These results suggest that the religiosity of CEOs does
influence their capital structure decisions as well as the way
in which credit agencies view their firms. CEO religiosity,
however, does not appear to be related to how bond investors
price bonds and contract on bond covenants. In contrast, the
religiosity ratio at firm headquarters has significant coef-
ficients in the market leverage regression, the credit rating
regression, and the covenant regression. These results show
that while a CEO’s religious beliefs have some influence on
how she decides on capital structure, CEO religiosity does
not subsume the effects of local religiosity on capital struc-
ture, credit ratings, bond yield, and covenants. This evidence
also sheds light on how local religion influences corporate
behavior and whether such influence manifests through top
management or through the general corporate culture.
Reverse Causality
One may argue that a firm run by a more conservative
management may choose a more religious location for its
headquarters. While this is unlikely to be the case because
companies typically choose their headquarters locations by
proximity to customers, suppliers, and production, we, nev-
ertheless, perform the following two tests to address this
possibility.
First, Loughran and Schultz (2005) and John et al. (2011)
argue that firms operating in the manufacturing, mining,
and, agriculture sectors (SIC codes between 100 and 3999)
are more likely to choose their headquarters location based
on factors related to physical production and distribution.
Thus, these firms are unlikely to choose their headquarters

13
176 J. Cai, G. Shi

Table 7  Subsample analysis of firms that are unlikely to suffer from reverse causality
Panel A: subsample for manufacturing, mining, and agriculture firms
Dependent variable =
Independent vari- Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
ables and statistics

(1) (2) (3) (4) (5)

Religiosity ratio − 0.121*** (− 7.510) − 0.095*** (− 6.887) − 0.190 (− 0.701) − 0.448* (− 1.785) − 0.247* (− 1.681)
Control variables Included Included Included Included Included
N 12,524 12,524 6412 1024 1588
Adj. R2 0.083 0.109 0.776 0.713 0.742
Panel B: subsample for the firms with assets above $1 billion
Dependent variable =
Independent vari- Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
ables and statistics

(1) (2) (3) (4) (5)

Religiosity ratio − 0.050*** (− 2.998) − 0.018 (− 1.353) 0.694*** (2.883) − 0.406** (− 2.183) − 0.335*** (− 2.758)
Control variables Included Included Included Included Included
N 10,087 10,087 9032 1730 2456
Adj. R2 0.119 0.155 0.713 0.707 0.703

This table presents the OLS coefficients of the religiosity ratio for regressions in Tables 2, 3, 4 for various subsamples. Control variables are
included in all regressions but are not tabulated for brevity. Standard errors are robust to clustering at county and year levels; t-statistics are in
parentheses
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

locations based on religiosity. Panel A of Table 7 shows
that for this subsample of firms the coefficient of the local
religiosity ratio has the same signs as the main results in all
five models and remains statistically significant in four out
of the five cases.
Second, John et al. (2011) argue that relocation is more
costly for larger firms. We, therefore, focus on a subsam-
ple of larger firms with over $1 billion in assets since these
firms are less likely to relocate their headquarters. Panel
B of Table 7 shows that in all five models the religiosity
ratio retains the same signs as in Tables 2, 3, 4, and the
coefficients are statistically significant at the 1% level in
three cases and at the 5% level in one case. The two tests
in Table 7 suggest that our main findings are unlikely to be
driven by reverse causality.
Other Potentially Omitted Variables
Social and Legal Environment
A county’s religiosity may be correlated with other social
environment factors such as conservatism, minority popula-
tion, income, and urbanization that also influence individual
and organizational decision-making. We conduct the follow-
ing sensitivity tests to address this issue.
First, the more conservative states such as Utah tend to be
more religious and less diverse than the more liberal states.
Companies in these states may also have more conserva-
tive financing policies. To investigate whether our results
are driven by political conservatism, we identify the ten
most conservative states and perform the tests reported in
Tables 2, 3, 4 using only the firms located outside of these
ten states.28 Panel A of Table 8 reports similar coefficients
for the religiosity ratio as those in Tables 2, 3, 4. Four out
of the five coefficients are statistically significant at the 1%
level, and the fifth one is significant at the 5% level. Among
the firms not located in the more conservative states, those
with a more religious culture tend to use less debt financ-
ing, receive better credit ratings, pay a lower interest rate,
and face fewer covenant restrictions. This evidence suggests
that political conservatism is unlikely an omitted variable
in our study.
Second, rural areas typically have a more religious popu-
lation (Chalfant and Heller 1991), while firms located in
rural areas tend to have greater information asymmetry
28
The 10 most conservative states include Mississippi, Idaho, Ala-
bama, Wyoming, Utah, South Dakota, Louisiana, North Dakota,
South Carolina, Arkansas, as defined by a 2010 Gallup poll. See
http://www.gallup.com/poll/146348/mississippi-rates-conservative-
state.aspx/ for details.

13
Do Religious Norms Influence Corporate Debt Financing? 177

Table 8  Robustness of excluding rural firms and firms located in the more conservative states
Panel A: excluding firms located in the ten most conservative states
Dependent variable =
Independent vari- Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
ables and statistics

(1) (2) (3) (4) (5)

Religiosity ratio − 0.071*** (− 5.140) − 0.063*** (− 5.406) 0.978*** (4.309) − 0.479** (− 2.514) − 0.329*** (− 2.703)
Control variables Included Included Included Included Included
N 18,083 18,083 10,706 1712 2690
Adj. R2 0.072 0.104 0.732 0.707 0.714
Panel B: excluding firms located in MSA with fewer than 1 million population
Dependent variable =
Independent vari- Excess book leverage Excess market leverage Credit rating Log (yield spread) Log (1 + covenant index)
ables and statistics

(1) (2) (3) (4) (5)

Religiosity ratio − 0.022 (− 1.419) − 0.035*** (− 2.622) 1.188*** (4.738) − 0.462** (− 2.237) − 0.292** (− 2.168)
Control variables Included Included Included Included Included
N 14,860 14,860 8647 1397 2197
Adj. R2 0.077 0.106 0.747 0.722 0.712

This table presents the OLS coefficients of the religiosity ratio for regressions in Tables 2, 3, 4 for subsamples of firms not located in the 10 most
conservative states (Panel A) and firms headquartered in the MSA with greater than 1 million population (Panel B). The 10 most conservative
states include Mississippi, Idaho, Alabama, Wyoming, Utah, South Dakota, Louisiana, North Dakota, South Carolina, Arkansas, according to a
2010 Gallup poll (http://www.gallup.com/poll/146348/mississippi-rates-conservative-state.aspx/) The same control variables are included in all
regressions but are not tabulated for brevity. Standard errors are robust to clustering at the county and year levels; t-statistics are in parentheses.
* **
, , and ***, indicates statistical significance at the 10, 5, and 1% levels, respectively

(Loughran and Schultz 2006) and exhibit higher cost of debt
(Francis et al. 2008). If rural firms represent an omitted vari-
able, religiosity would have a positive correlation with the
cost of debt, which conflicts with our main findings. Never-
theless, we exclude in sensitivity tests those firms headquar-
tered in metropolitan statistical areas (MSA) with fewer than
1 million total populations or not headquartered in an MSA.
Panel B of Table 8 shows that among the samples of the non-
rural firms, those located in more religious areas have signif-
icantly more conservative capital structure. These firms also
have significantly better credit ratings, significantly lower
bond yields, and significantly few debt covenants after con-
trolling for capital structure and various firm, bond, state,
and demographic variables. The overall evidence in Table 8
suggests that the relation we document between religiosity
and the capital structure variables is unlikely to be driven
by conservatism.
The prevailing social norms such as the religion of an area
may be related to the local legal institution, i.e., state laws
governing corporations, business combination, bankruptcies,
and stakeholder rights. For instance, some states have anti-
takeover laws that may better protect the rights of bondhold-
ers (Francis et al. 2010). To control for the effects of legal
institutions on a company’s debt financing, we include the
incorporation state fixed effects in all our analyses.
Corporate Governance, Life Cycle, Firm Age, and Family
Firms
The religiosity of an area may also affect the corporate gov-
ernance of firms located in the area. Effective corporate
governance may enhance credit ratings (Ashbaugh-Skaife
et al. 2006) and may lower cost of debt (Qiu and Yu 2009).
To address the possibility of corporate governance being an
omitted variable, we follow Chava et al. (2010) and include
the GIM index, the institutional holdings, and the number
of blockholders in all our regression analyses. Further, we
do not find a significant association between the religiosity
ratio at a firm’s headquarters and these corporate governance
measures in our samples.
In addition, while we do not control for the board char-
acteristics in our main results (because nearly half of our
sample firms do not have available data from the RiskMet-
rics Director database), we control for board size, percent of
independent directors, and whether the CEO is the chairman
of the board in a sensitivity test for those firms with available
board data. The main results are similar. The results of these
tests suggest that corporate governance is unlikely to be an
omitted variable in our main findings.
While we control for industry fixed effects in all regres-
sion analyses, firms in more traditional industries may be

13
178
more likely to have their headquarters in more religious
areas. To ensure that our results are not driven by the indus-
try composition of our samples, we examine the average
and median values of the religiosity ratio along with other
control variables for each of the 48 Fama–French industries
and find no obvious concentration of certain industries in
more religious areas.
Mature firms tend to have more stable operation and
lower risk. If these firms also tend to be located in more
religious areas, firm age could be a potential omitted vari-
able in our analysis. To address this possibility, we control
for firm age in a robustness test and find similar results.
Firms controlled by the founder may also be more con-
servative. If such firms tend to concentrate in more religious
areas, our results could be driven by these firms. To address
this possibility, we identify founder-controlled firms if a
firm lists one of its executives or directors as founders or
co-founders in the BoardEx database.29 Our main results
are robust if we control for founder firms or exclude these
firms entirely.
County‑Level Fixed Effects
The religiosity ratios vary at the county level and conse-
quently may be correlated with certain county character-
istics. While we control for a number of demographic and
geographic variables, the possibility that certain omitted
county-level variables drive the main results remains. We
therefore include county fixed effects along with the industry
and year fixed effects in a robustness test. In this test, we rely
on the time series variation of the religiosity ratio for iden-
tification. Since the religiosity ratio tends to be relatively
stable over time, we expect to find weaker results in this test.
In unreported analysis, the coefficients of the (predicted)
religiosity ratio obtain similar economic magnitude and sta-
tistical significance as in the main results in the capital struc-
ture, credit ratings, and covenant regressions, but become
nonsignificant in the bond yield regression.
Other Additional Tests
Catholic Versus Protestant Religiosity Ratio
The literature finds mixed evidence on whether Catholics are
more risk averse than Protestants.30 We separate the religi-
osity ratio into Protestant ratio, Catholic ratio, and other
29
Because Boardex database is available only for the years after
2000, we perform this sensitivity test for a sample during the period
of 2000–2010.
30
See Kumar et al. (2011), Shu et al. (2012), Renneboog and Spaen-
jers (2012) and Baxamusa and Jalal (2014, 2016).
13
J. Cai, G. Shi
religion ratio and include the three ratios as the main inde-
pendent variables in the debt financing regressions. Because
other religions have relatively small populations in the USA,
the overall religiosity ratio approximately equals the sum of
the Catholic ratio and the Protestant ratio. In all five regres-
sions, the coefficients of the Catholic ratio are greater in
magnitude than those of the Protestant ratio (untabulated).
In addition, the Catholic ratio is statistically significant in
all five cases, while the Protestant ratio is not significant in
the bond yield and debt covenant regressions. In contrast to
prior evidence that the Catholic religion is associated with
greater gambling propensity, we document no evidence that
firms located in more Catholic regions are less conservative
in their debt financing decisions than firms located in more
Protestant regions.
Fama and MacBeth (1973) Type Regressions
Because the main independent variable in this study, the
religiosity ratio, is stable over time, we estimate the Fama
and MacBeth (1973) type regressions to address the poten-
tial times series clustering of the independent variables.31
Similar to our main results, the coefficient of the local religi-
osity variable retains the same signs as in Tables 2, 3, 4 in all
five regressions and is statistically significant in four cases.
Religiosity and Bond Issuance Size and Term
If firms located in more religious areas are more conserva-
tive, their conservatism may manifest itself in other financ-
ing decisions of these firms. Specifically, we examine
whether local religiosity influences the size and the time
to maturity of bond issuances. Our data come from FISD,
and our sample consists of 2801 bond issuances.32 If the
religious firms make more conservative financing decisions,
we expect these firms to issue a smaller amount of bonds and
use shorter terms. In unreported robustness tests, we find
these practices are the case.
Conclusion
Social norms such as religion influence individual and cor-
porate decisions. Hilary and Hui (2009) document that firms
31
For companies issuing multiple bonds in a year, we use the aver-
age bond yields and the average number of bond covenants for all the
bonds issued in the same year as the dependent variables in the bond
yield and debt covenant regressions, respectively. Similarly, we also
average the values of the other bond characteristics as the control var-
iables. As a result, the numbers of observations in the bond yield and
debt covenant regressions are smaller than those in Table 4.
32
We find similar results using the SDC sample.
Do Religious Norms Influence Corporate Debt Financing? 179
located in more religious areas exhibit more conservative
investment behavior. In this paper, we study whether such
social norms influence firms’ capital structure as well as
outside parties’ perception, and consequently their business
transactions with the firms.
Using large samples of leverage ratios, credit ratings,
bond yields, and debt covenants, we document that firms
located in more religious areas tend to use less debt in their
capital structure. More importantly, these firms receive bet-
ter credit ratings, pay lower bond yields, and face fewer
restrictive covenants after controlling for capital structure,
corporate governance, legal environment, demographi-
cal factors, and other firm and bond characteristics. These
results are both statistically significant and economically
meaningful. Using the 2002 revelation of sexual abuses by
Catholic priests as an exogenous shock, we show that our
findings are unlikely to be driven by endogeneity issues.
Additional tests suggest that the effects of the local reli-
gious culture are not subsumed by CEO religiosity. We also
conduct a number of additional tests to further address the
possibility of omitted variables and reverse causality.
Our evidence illustrates the important roles that social
norms such as religion play in both corporate decisions and
business transactions. Companies located in a more religious
environment appear to be viewed as more prudent and more
trustworthy by outside parties and are rewarded with lower
cost of capital and less restrictive contracts, which can have
a significant impact on firm value and shareholder wealth.
Acknowledgements A part of this study was completed, while
Guifeng Shi was visiting Wharton. Guifeng Shi acknowledges fund-
ing from the National Nature Science Foundation of China (NSFC-
71002036), Shanghai Pujiang Program (13PJC078), and the China
Scholarship Council. We thank Matt Billett, Greg Shailer (the Editor),
and two anonymous referees for their constructive comments.
Appendix: Variables Definitions
Religiosity ratio equals the number religious adherents in
a county (from ARDA) divided by the total population in
the county (from the US Census). Data on religiosity are
available for years 1990, 2000, and 2010. We linearly inter-
polate the data to obtain the values for the years in between.
Source: ARDA.
Firm and Bond Characteristics
Book leverage ratio equals total debt (Compustat #9 + #34)
divided by book value of total assets (Compustat #6).
Source: Compustat.
Excess Book leverage ratio equals the residual from a
panel regression of the book leverage ratio on market-to-
book ratio, ROA, tangible assets/total assets, log sales, R&D
expenses/Sales, SG&A expenses/sales, dividend, deprecia-
tion/assets, and industry (Fama–French 48 industry classi-
fication) and year fixed effects.
Market leverage ratio equals total debt (Compustat
#9 + #34 divided by market value of total assets, which
equals the book value of total assets (Compustat #6) minus
the book value of common equity (Compustat #60) plus the
market value of common equity (Compustat #25* Compus-
tat #199). Source: Compustat.
Excess Market leverage ratio equals the residual from a
panel regression of the market leverage ratio on market-to-
book ratio, ROA, tangible assets/total assets, log sales, R&D
expenses/Sales, SG&A expenses/sales, dividend, deprecia-
tion/assets, and industry (Fama–French 48 industry classi-
fication) and year fixed effects.
Credit rating equals the median S&P long-term domestic
issuer credit rating (Compustat #280) over the 12 months in
a fiscal year. We convert the credit ratings into numbers as
follows: 21 for AAA, 20 for AA +, 19 for AA, 18 for AA −,
17 for A +, 16 for A, 15 for A −, 14 for BBB +, 13 for BBB,
12 for BBB −, 11 for BB +, 10 for BB, 9 for BB −, 8 for
B +, 7 for B, 6 for B −, 5 for CCC +, 4 for CCC, 3 for CC,
2 for C, and 1 for D and SD. Source: Compustat.
Yield spread for fixed rate bonds is defined as the dif-
ference between the yield-to-maturity of a corporate bond
and the yield-to-maturity of its duration equivalent Treasury
bond. The yield-to-maturity at the time of the bond issue on
a corporate bond is the discount rate that sets the present
value of its future payments equal to its offering price. The
Treasury bond yield is measured by the yield on the constant
maturity Treasury security series provided by the Federal
Reserve. If there is no duration equivalent Treasury security
available to match the duration of the corporate bond, the
yield-to-maturity of the Treasury security is calculated as
the linear interpolation between the two securities with the
closest maturity.33 The yield spread for a floating rate bond
equals the difference between the reference index and the
yield on its duration equivalent Treasury security over the
first interest period plus the bond’s basis point spread over
the reference index. Source: SDC.
Log yield spread is the natural logarithm of yield spread.
Source: SDC.
Covenant index equals the sum of 15 indicator variables,
each of which equals one if a bond has at least one cov-
enant in the given category of covenants as defined in Bil-
lett et al. (2007) and zero otherwise. The 15 categories of
covenant restrictions include dividend payment restrictions,
33
Following Cremers et al. (2007), we obtain one-year, three-year,
five-year, seven-year, 10-year, and 30-year constant maturity Treasury
yields from the Federal Reserve’s H-15 Release, which we interpolate
into a piecewise linear term structure.
13
180
share repurchase restrictions, funded debt restrictions, sub-
ordinated debt restrictions, senior debt restrictions, secured
debt restrictions, total leverage tests restrictions, sale and
lease-back restrictions, stock issuance restrictions, credit rat-
ing and net worth triggers, cross-default provisions, poison
put, asset sale clauses, investment policy restrictions, and
merger restrictions.
Subsequent financing covenant index equals the sum of
seven indicator variables that are associated with the follow-
ing categories of covenants: funded debt restrictions, sub-
ordinated debt restrictions, senior debt restrictions, secured
debt restrictions, total leverage tests restrictions, sale and
lease-back restrictions, and stock issuance restrictions.
Investment covenant index equals the sum of three indi-
cator variables that are associated with the following cat-
egories of covenants: asset sale clauses, investment policy
restrictions, and merger restrictions.
Dividend covenant index equals the sum of two indicator
variables that are associated with the following categories
of covenants: dividend payment restrictions and share repur-
chase restrictions.
Event covenant index equals the sum of three indicator
variables that are associated with the following categories of
covenants: credit rating and net worth triggers, cross-default
provisions, and poison put.
Bond rating is the average bond rating of S&P, Moody,
and Fitch as reported by SDC or FISD and is coded between
21 (AAA) and 1 (D). If the specific bond rating is missing
from SDC or FISD, we use the issuing firm’s credit rating
from Compusat.
Floating bond indicator (1/0) equals one if the bond’s
coupon is floating, and zero otherwise. Source: SDC and
FISD.
Callable bond indicator (1/0) equals one if the bond is
callable, and zero otherwise. Source: SDC and FISD.
Putable bond indicator (1/0) equals one if the bond is
putable, and zero otherwise. Source: SDC and FISD.
Private placement indicator (1/0) equals one if a bond
issue is privately placed (Rule 144A). Source: FISD.
Log (maturity) equals the natural logarithm of a bond’s
time to maturity in years. Source: FISD.
Log (offering amount) equals the natural logarithm of the
offering amount of a bond. Source: FISD.
Issuing amount/Net fixed assets equals the issuing amount
of a bond divided by the issuing firm’s net fixed assets
(Compustat variable PPENT) in the previous year. Source:
FISD and Compustat.
Convertible indicator (1/0) equals one if a bond can be
converted into other securities, and zero otherwise. Source:
FISD.
Q equals the market value of assets divided by book value
of assets, where the market value of assets equals the book
13
J. Cai, G. Shi
value of assets minus the book value of equity plus the mar-
ket value of equity. Source: Compustat.
ROA equals the net income before extraordinary items
(Compustat #18) divided by total assets. Source: Compustat.
Negative net income (1/0) equals one if the net income
before extraordinary items (Compustat #18) is negative in
the current and prior fiscal year, and zero otherwise. Source:
Compustat.
Return volatility equals the standard deviation of the daily
return during a fiscal year.
ROA volatility equals the standard deviation of ROA from
year t-5 to t + 5. Source: Compustat.
Investment rate equals capital expenditure (Compustat #
128) divided by the net PPE (Compustat # 8) of previous
fiscal year.
Interest coverage equals the operating income before
depreciation (Compustat #13) divided by interest expense
(Compustat #15). Source: Compustat.
Subordinated debt indicator (1/0) equals one if the
firm has subordinated debt, and zero otherwise. Source:
Compustat.
PPE/Assets ratio equals the net PPE (Compustat #8)
divided by total assets. Source: Compustat.
Institutional holdings equal the number of shares held by
institutions divided by shares outstanding in the quarter prior
to the bond issuance. Source: Thomson Reuters Institutional
(13f) Holdings.
Number of block holders equals the number of financial
institutions that hold over 5% of a firm’s outstanding shares
as of the quarter prior to the bond issuance. Source: Thom-
son Reuters Institutional (13f) Holdings.
GIM index equals the sum of 24 anti-takeover provisions
from the IRRC database and is available for the years 1990,
1993, 1995, 1998, 2000, 2002, 2004, and 2006. For inter-
mediate years, we use the GIM index from the most recent
year. Source: Gompers et al. (2003) and IRRC Governance
database.
R&D/sales equals Research and development expenses
(Compustat #46) divided by sales (Compusta #12). We set
the variable value to zero if R&D expense is missing.
SGA/sales equals SG&A expenses (Compustat #189)
divided by sales (Compustat #12).
Dividend dummy equals one if the firm pays common div-
idend (Compustat #21) in a fiscal year, and zero otherwise.
Demographical Variables
Total population equals the total population in a county.
Source: US Census.
Male-to-female ratio equals the male population in
a county divided by the female population. Source: US
Census.
Do Religious Norms Influence Corporate Debt Financing? 181
Minority equals the minority populations (total popula-
tion minus white population) divided by the total population
of a county. Source: US Census.
Married equals the number of married households
divided by the total number of households in a county.
Source: US Census.
Age is the median age of a county’s population. Source:
US Census.
Education equals the number of people above 25 who
have a bachelor degree or higher education divided by the
number of people above 25 in a county. Source: US Census.
Income is the per capita personal income. Source: US
Census.
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