Asia-Pacific Journal of Financial Studies (2016) 45, 281–308 doi:10.1111/ajfs.

12130

Religion and Corporate Governance:

Evidence from 32 Countries*
Jaehyeon Kim**
Shidler College of Business, University of Hawaii at Manoa

Shirley J. Daniel
Shidler College of Business, University of Hawaii at Manoa

Received 20 August 2015; Accepted 15 February 2016

Abstract
This study seeks to understand the effects of informal constraints, particularly religious
denominations, on corporate governance. Using archival data from a panel sample of 32
countries—between 2006 and 2010—we find that a higher proportion of Protestantism is
associated with stronger corporate governance after controlling for cultural, economic, legal,
and institutional factors. This study provides empirical support for the socio-cultural theory,
which posits that socio-cultural variables such as religion are associated with the level of
agency costs (Charreaux, 2004, Corporate governance theories: From micro theories to
national systems theories, Working Paper). The findings of this study contribute to the cor-
porate governance, accounting, finance, and management literature by showing that social
norms, especially religion, have a strong effect on corporate governance practices. Moreover,
this study provides insights for policy makers who are interested in enhancing corporate gov-
ernance, allowing them to strengthen formal constraints such as rule of law for countries
where there is a low proportion of Protestants, in order to improve corporate governance.
Keywords Catholics; Catholicism; Corporate Governance; Protestant; Protestantism; Religion
JEL Classification: G34, O16

1. Introduction
Weber (1905) claimed that the Protestant work ethic translated to the development
of capitalism. His claim has been considered controversial since it was published.
Larcker and Tayan (2011) and Charreaux (2004) suggest that religion plays a key
role in shaping corporate governance. Specifically, Fama and Jensen (1983) note

*We thank Kee-Hong Bae, Sid Gray, and Ghon Rhee for comments on an earlier version of
the paper.
**Corresponding author: Jaehyeon Kim, Shidler College of Business, University of Hawaii at
Manoa, 2404 Maile Way, Honolulu, HI 96822, USA. Tel: +1-808-956-3249, Fax: +1-808-956-
9685, email: jaehyeon@hawaii.edu

© 2016 Korean Securities Association 281

J. Kim and S. J. Daniel

that Protestantism is likely to have a more positive impact on corporate governance

than Catholicism. Religious groups may attempt to imbue corporations with their
religious values. For example, NACD Directors Daily (2014) reported that the Inter-
faith Center on Corporate Responsibility (ICCR)1 led to governance changes in
JPMorgan Chase to subject executives to clawback provisions if their business units
engaged in unethical activity, and also to strengthen board accountability and over-
sight. In addition to the JPMorgan case, the ICCR has made a proposal for the sep-
aration of CEO and chairman at the Bank of America.
Religion and culture are distinct (Saroglou and Cohen, 2011; Ronen and Shenkar,
2013). According to Hofstede et al. (2010), there are three kinds of difference between
countries: identity, values, and institutions. Identity is composed of language and reli-
gion; values are national cultures; and institutions consist of rules, laws, and organiza-
tions. According to the social norm theory, social norms affect behavior because people
want to conform to their peer group (Kohlberg, 1967). Religion is a social norm. If the
behaviors of people are not consistent with what religion expects, those people will feel
discomfort. Many prior studies examine how religion affects individuals’ behaviors. For
example, Khavari and Harmon (1982) show that individual religiosity is negatively
related to the use of illicit or illegal substances. Grullon et al. (2010) observe that firms
with more religious employees show greater monitoring of corporate managers than
those with fewer religious employees. However, some studies find that religion does not
necessarily have a positive influence on the behavior of individuals. According to Agle
and Van Buren (1999), religion marginally affects management attitudes. Terpstra et al.
(1993) observe that atheists are the least involved in insider trading among religious
individuals, agnostics, and atheists. Based on this prior literature, the relationship
between religion and ethical behavior remains unclear.
Many prior studies examine the effects of religion on macroeconomic outcomes.
For example, Barro and McCleary (2003) indicate that religious beliefs in heaven
and hell are positively related to economic growth, but church attendance is nega-
tively related to economic growth. Landes (1998) finds that different religious
beliefs are associated with differences in economic growth. Though a number of
studies explore the relationship between religion and ethical behavior or between
religion and economic consequences, research about how religion might affect cor-
porate decision making is at an early stage. Furthermore, with globalization, the
populations of many nations have become increasingly diverse and the impact of
the proportions of particular religious affiliations on corporate governance practices
at a national or international level has not been investigated.
Policymakers, regulators, and investors emphasize the virtues of good corporate
governance, but defining good corporate governance is difficult. Prior research in
the U.S. has shown that better corporate governance leads to higher firm value

1
The ICCR is a religious group that files proxy resolutions for social values it supports to be
reflected in corporate actions. The stated purpose of the ICCR is to enable employees, cus-
tomers, and shareholders of multinational corporations to have a better future.

282 © 2016 Korean Securities Association

 Religion and Corporate Governance

(Gompers et al., 2003; Bebchuk et al., 2009) but it is not clear whether these results
will hold in cross-country settings in which cultural and institutional factors may
affect the implementation of corporate government practices (Daniel, et al., 2012).
Corporate governance has become an important factor as more firms have financed
themselves through stock markets, and diversification of ownership has become
greater. This has resulted in the separation of ownership and control, and as agency
theory predicts, a side effect of this separation may be that managers expropriate
firm shareholders for their private benefit. Executives exploit firm resources to their
advantage through excessive compensation, perquisites or pursuing negative net
present value (NPV) projects (Dittmar and Mahrt-Smith, 2007).
In developed markets, there is a prevalent agency problem that originates from
principal–agent conflict, or shareholders–management conflict (Jensen and Meckling,
1976). In emerging markets, there may be a principal–principal conflict between major-
ity and minority shareholders, which the conceptualization of the principal–agent con-
flict does not explain (Young et al., 2008). One reason why the principal–principal
conflict is prevalent in emerging economies is that emerging countries have a weak gov-
ernance environment, which emanates from the fact that they do not have an effective
and predictable rule of law (Brandes et al., 2000; Mitton, 2002). In particular, emerging
countries often lack formal institutions such as laws and regulations regarding account-
ing requirements, information disclosure, securities trading, and their enforcement.
Even when laws and regulations do exist, they may not operate as intended. Conse-
quently, standard corporate governance mechanisms do not serve expected roles in
emerging economies (Peng, 2004; Peng et al., 2003). Thus, informal institutions such as
relational ties and family connections have led to concentrated ownership, which in
turn has precipitated the principal–principal conflict (Young et al., 2008). For good
corporate governance, there is no one-size-fits-all approach, because religion and cul-
ture in addition to the economic and legal factors of an individual country may occupy
significant roles in developing and maintaining good corporate governance practices.
Tajfel (1981) posits a social identity theory that individuals are affected by the
cultural norms of their environments. Zheng et al. (2012) propose that informal con-
straints such as culture influence economic outcomes as a result of their influence on
individuals’ behavior and decision making. According to Halek and Eisenhauer
(2001), a large part of an individual’s personal identity is based on social group mem-
bership such as one’s nationality, religion, ethnicity, and occupation. Williamson
(2000) suggests that informal constraints, religion, and culture are positioned at the
top and affect economic consequences through rules and laws. Specifically, Daniel
et al. (2012) suggest that culture influences corporate governance practices through
national institutions. Volont
e (2015) finds that within a single institutional frame-
work (e.g., Swiss federal corporate law), firms in Swiss–French areas and firms in
Roman Catholic cantons are more likely to have one-tier boards, whereas two-tier
boards are more prevalent in Swiss–German areas and Protestant cantons.
Boytsun et al. (2011) note that though Scandinavian countries have few formal
rules protecting investors (La Porta et al., 1998), they have the highest level of

© 2016 Korean Securities Association 283

J. Kim and S. J. Daniel

corporate governance, which supports the thesis that informal institutions are cru-
cial for corporate governance. This study explores whether differences in religion
explain differences in corporate governance practices. We posit that religion-
induced heterogeneity could influence economic decisions. To measure the gover-
nance practices of each country, we use country corporate governance indices from
Governance Metrics International (GMI). The results of the study show that the
proportion of Protestants in a country is positively related to national corporate
governance scores, reflecting the practices of corporations in the country.
This study makes two major contributions. First, it finds that religious social
norms serve as a mechanism of corporate governance. This finding is important
because it explicates why cross-country differences in corporate governance cannot
be completely explained by firms’ fundamentals and the country’s fundamentals
such as legal, economic, or cultural factors. Second, the research also contributes to
the growing number of studies investigating the effect of religion on corporate out-
comes (e.g., Hilary and Hui, 2009; Dyreng et al., 2012; McGuire et al., 2012). Fur-
thermore, this study contributes to both the understanding and practice of
corporate governance at the country level.
The remainder of the paper is organized as follows. Section 2 summarizes the
prior literature in this area and develops a testable hypothesis. Section 3 provides
the data and methodology and presents the empirical results. Section 4 discusses
robustness tests, while Section 5 offers concluding remarks.

2. Literature Review and Hypothesis Development

2.1. Literature Review
2.1.1. Religion and Ethical Behavior.
Ethics research suggests that religious thoughts promote self-control and lead to
rejecting morally doubtful decisions in business situations (McCullough and Wil-
loughby, 2009; Vitell, 2009). As noted earlier, religion is a type of social norm. Social
norms affect individuals externally (pretending to agree, but privately disagreeing) or
internally (consistency of beliefs and behavior publicly and privately) (Kelman, 1958).
Kennedy and Lawton (1998) studied students at religiously affiliated universities and
compared them to unaffiliated institutions. Their results show that religiosity is nega-
tively associated with a willingness to behave unethically. In addition, they find that
students at the evangelical university were much less likely to engage in unethical
behavior than those at either the Catholic or unaffiliated institutions. Guiso et al.
(2003) show that Protestants place more confidence in others and the legal system
than do Catholics; cheating on taxes and accepting bribes are less likely to occur
among Protestants than among Catholics. Asch (1956) and Milgram (1963) demon-
strate that human beings cannot behave/act without considering social pressures.
When people follow a religion, they are likely to be subject to the rules of their reli-
gion. Thus, they make efforts to behave in accordance with the norms or messages
associated with their particular religion. In contrast to the above-mentioned studies,

284 © 2016 Korean Securities Association

 Religion and Corporate Governance

some studies report unexpected results. For example, Guth et al. (1995) find a nega-
tive association between religious commitment and environmentalism. Smith et al.
(1975) observe that religious and nonreligious people do not show a difference in
behavior such as dishonesty or cheating. Consequently, the effect of religion on indi-
vidual behavior does not seem to be clear-cut.
2.1.2. Religion and Economic Outcomes.
Tomes (1985, p. 245) observes that “economics is fundamentally atheistic. Religious
beliefs, practices, and behavior play no role in the life of homo economicus.” Nev-
ertheless, a number of studies report that religion has an impact on various eco-
nomic outcomes. In particular, one body of research studied the relationship
between religion and economic development. Landes (1998), and Barro and
McCleary (2003) find that religious beliefs and economic growth are positively cor-
related. Various studies have attempted to find out which religious denomination is
better for economic success. According to Grier (1997), previous British—and thus
Protestant—colonies exhibit higher growth rates and income levels than colonies
from Catholic nations. Stulz and Williamson (2003) find that a country’s main reli-
gion has an impact on the variation in investor protection and Protestant countries
exhibit stronger creditor rights than Catholic countries.
2.1.3. Religion and Corporate Outcomes.
Though a large number of studies examine the relationship between religion and eco-
nomic consequences or between religion and ethical behavior, a relatively small num-
ber of studies investigate the effect of religion on firm-level outcomes. Hilary and Hui
(2009) find that US companies in counties of high religiosity show less risk exposure,
lower investment, and growth rates, but higher undiscounted profits. McGuire et al.
(2012) report that religiosity is negatively associated with accrual-based earnings man-
agement. Grullon et al. (2010) show that the religiosity of a county in the US is nega-
tively associated with unethical behavior by locally headquartered firms, such as
earnings management, option backdating, and excessive executive compensation.
Kumar et al. (2011) find that in regions with a higher ratio of Catholics to Protestants,
investors are likely to hold stocks with lottery features and there are more employee
stock option plans, which are preferred by employees with stronger gambling prefer-
ences. Chen et al. (2014) show that firms located in a county with a higher Catholics-
to-Protestants ratio tend to run riskier projects and pursue more innovation.

2.2. Hypothesis Development

According to behavioral psychology and other branches of social science, individuals
are self-interested. Using a theory of rational self-interest, Becker (1976) explains
various activities that benefit people, such as committing a crime or fraud. In the
corporate governance context, self-interested executives are likely to exhibit
rent-seeking behavior at the expense of minority shareholders. In contrast, there is
another view of individuals that emphasizes moral salience. According to moral sal-
ience, many people restrain themselves on the basis of morality. In this context, not all
executives are rent-seekers. Boytsun et al. (2011) note that although individuals have

© 2016 Korean Securities Association 285

J. Kim and S. J. Daniel

drawn up rules with better clarity through civilization, formal constraints have not
fully substituted informal constraints; informal constraints may have an independent
direct influence. They also suggest that religious organizations create informal con-
straints that have visible and unambiguous characteristics individuals can refer to;
more religious communities may deter expropriation under threat of a moral sanc-
tion. Individuals’ moral salience depends on religious convictions and their personal-
ity (Larcker and Tayan, 2011). The socio-cultural theory suggests that socio-cultural
variables such as religion are associated with the level of agency costs (Charreaux,
2004).
Fama and Jensen (1983, p. 320) note:

“To our knowledge the only nonprofit organization that is financed with donations but
lacks a board of important continuing donors with effective decision control rights is the
Roman Catholic church. Parish councils exist in local Catholic churches, but unlike their
Protestant and Jewish counterparts, they are only advisory. The clerical hierarchy controls
the allocation of resources, and the papal system does not seem to limit the discretion of
the Pope, the organization’s most important decision agent . . . Although Protestantism
arose over doctrinal issues, the control structures of Protestant sects—in particular, the
evolution of lay councils with power to ratify and monitor resource allocation decisions—
can be viewed as a response to breakdowns of the contract structure of Catholicism, that
is, expropriation of Catholic donor-customers by the clergy. The evolution of Protes-
tantism is therefore an example of competition among alternative contract structures to
resolve an activity’s major agency problem—in this case monitoring important agents to
limit expropriation of donations.”
That is, the behavior of the Pope, the most important decision-making agent in
the Catholic Church is not properly monitored by parish councils. Pope Francis has
announced changes in the management and transparency of the Vatican Bank after
a series of scandals revealed decades of questionable spending, money laundering,
and other problems at the Vatican Bank (Walsh, 2015). In contrast, lay councils in
Protestant churches monitor the behavior of those who make financial decisions.
The social norm theory predicts that individuals are influenced by social norms,
and this impacts corporate individuals’ (CEOs, boards of directors, shareholders)’
decision making related to corporate governance. Influenced by informal institu-
tions from Protestant churches, corporate persons such as boards of directors and
shareholders are more likely to have greater monitoring against management. The
lay council structure in Protestant churches is comparable to the monitoring role
of a board of directors against management. That is, it corresponds to board
accountability incorporated into the GMI index.2 We expect a higher proportion
of Protestants to be associated with better corporate governance practices, particu-
larly board accountability. Fama and Jensen (1983) note that there exists the

2
This study draws upon the GMI index to measure corporate governance practices. The cor-
porate governance practices that the GMI examines include board accountability, financial
disclosure and internal controls, shareholder rights, executive compensation, takeover
defenses and ownership base, and corporate accountability.

286 © 2016 Korean Securities Association

 Religion and Corporate Governance

expropriation of Catholic donor-customers by the clergy. This situation is compa-

rable to the one where managers expropriate minority shareholders for private
gain. This corresponds to shareholder rights incorporated into the GMI index. We
expect a higher proportion of Protestants in a country to be related to better cor-
porate governance practices, particularly shareholder rights. Stulz and Williamson
(2003, p. 318) note:

As Calvin wrote in his Institutes of the Christian Religion, it is ’safer for a number to
exercise government, so that ... if one asserts himself unfairly, there may be a number
of censors and masters to restrain his willfulness’ (bk. 4, Chapter 2, paragraphs 8 and
31).
This is also related to board accountability where board members monitor man-
agement to prevent management from engaging in value-destroying activities for
his or her private gain or to deter managements’ expropriation of shareholders.
Stulz and Williamson (2003, p. 318) also note:

“Whereas the Catholic church has a supreme arbiter of the common good, the Protestant
faiths do not. With Protestantism, each individual determines on his own what is right.
Churches then become associations of individuals who think alike, rather than hierarchical
organizations through which the definition of the common good is passed down to the
members.”
This implies that, in Protestant churches, power is not concentrated in a few
members. Boytsun et al. (2011) suggest that religion translates into good eco-
nomic attitudes, which, in turn, engender good corporate governance. Overall,
religion is expected to play a key role in explaining comparative corporate
governance.
Building on the socio-cultural theory, we conjecture that a higher proportion of
Protestants in a country is related to better corporate governance practices. Thus
our hypothesis is:

Hypothesis: A higher proportion of Protestants in a country is associated with better corporate

governance practices by firms in that country.

3. Methodology, Data, and Results

3.1. Methodology
To explore the influence of religion on corporate governance practices, we use a
balanced panel data of 160 country-year observations from 32 countries from 2006
to 2010. Because this study employs panel data, standard errors may be correlated
across time by country. Thus, we cluster standard errors by country.
Si; t ¼ a0 þ a1  Pi; t þ a2  CONTROLSi; t þ gDyear þ ei;t
where Si,t = Corporate governance scores (GOV) of 32 countries from 2006
through 2010, obtained from GMI for 2006, 2007, 2008, 2009, and 2010;

© 2016 Korean Securities Association 287

J. Kim and S. J. Daniel

Pi,t = Proportion of Protestants (PERCENTPROT), Proportion of Catholics (PER-

CENTCATH), Proportion of Buddhists (PERCENTBUD), and Proportion of
Muslims (PERCENTMUS) in a country from Stulz and Williamson (2003)
and Johnstone and Mandryk (2001);
CONTROLSi, t =
a. Product of INVPRO and RL where INVPRO is corrected anti-director rights
index from Spamann (2010), and RL is rule of law from Kaufmann et al. (2011)
b. Common law (COMMONLAW) from La Porta et al. (1998)
c. Natural log of GDP per capita from the World Bank (LN(GDP))
d. Stock market capitalization / GDP, from the World Bank (STOCKMARKET)
e. Collectivism (COLLECT), Power distance (POWDI), Uncertainty avoidance
(UNAV), and Gender Egalitarianism (GENDER) from House et al. (2004)
Dyear = Array of year dummies which are used to consider the time effect on
corporate governance practices across countries.

The composite country scores used in this study reflect the corporate governance
practices of the universe of firms rated by GMI within each country as compared to the
overall global universe of rated firms. The GMI ratings were publicly available on the
GMI website for 2006 to 2010. The last year in which the GMI ratings were published
on the GMI website was 2010 (GMI 2006-10), as GMI became the combined entity of
Governance Metrics International, The Corporate Library, and Audit Integrity, which
all merged in December 2010. In August 2014, MSCI acquired GMI. With regard to
2006–2010, GMI scored corporate governance ratings for individual companies

“by developing a highly-detailed governance profile incorporating hundreds of variables

per company plus analyst insights. In addition to reviewing board composition, board
leadership, company documents and websites to identify stated policies and procedures,
GMI also reviews regulatory actions, legal proceedings and other sources to gauge whether
company behavior is consistent with its stated policies. Once database profiles are com-
plete, GMI applies a scoring algorithm to generate company ratings on a scale of 1.0 to
10.0 (10.0 being the highest). The use of asymmetric geometric scoring is meant to mag-
nify the impact of outliers. This includes both those with the very best practices – who
are then rewarded more – or those with the worst – who are penalized. GMI scores are
relative in that each company is scored against other companies in the GMI research uni-
verse” (Governance Metrics International (GMI), 2006a).
Following Doidge et al. (2007), we control for legal environment using the pro-
duct of regulation, represented by rule of law (Kaufmann et al., 2011) and investor
protection (Spamann, 2010), represented by the corrected anti-director rights index.3

3
In contrast to Doidge et al. (2007), we use the corrected anti-director rights index, not the
anti-self-dealing index, because Spamann (2010) shows that the corrected anti-director rights
index is a preferable measure of investor protection. Because Spamann (2010) does not cover
Indonesia, I obtained INVRPO from the anti-director rights index in La Porta et al. (1998).
Spamann (2010) and La Porta et al. (1998) doesn’t cover China, I obtained INVPRO from
the revised anti-director rights index in Djankov et al. (2008).

288 © 2016 Korean Securities Association

 Religion and Corporate Governance

We expect a positive association between the legal environment and corporate gover-
nance practices.
La Porta et al. (1998) document that countries with a tradition of common
law have stronger shareholder rights than countries with a tradition of civil law.
This originates from the fact that common law tends to value private property
rights more than the rights of the state, compared to civil law. We therefore
expect a positive relationship between common law and corporate governance
practices.
Kwok and Tadesse (2006) note that the level of economic development, such as
GDP per capita, represents the overall institutional quality. Developed countries
have better institutional quality, which leads to better supervision and regulation.
We therefore expect GDP per capita to be positively associated with corporate gov-
ernance practices.
We control for stock market capitalization divided by GDP, following Doidge
et al. (2007). Daniel et al. (2012) show that culture influences corporate governance
through formal institutions. Therefore we control for culture, which is represented
by collectivism, power distance, uncertainty avoidance, and gender egalitarianism.
We include year dummies to control for the average difference in the level of cor-
porate governance practices across years.

3.2. Sample Description

We base our sample on 32 countries whose governance scores are measured
from 2006 through 2010 by GMI.4 Of these 32 countries, the primary religion
of 10 countries is Protestantism; 11 countries are primarily Catholic; three
countries are primarily Buddhist; and three are primarily Islamic. Five countries
have a primary religion other than Protestantism, Catholicism, Buddhism, or
Islam.
GMI ratings are scored from 1.0 to 10.0. We average five-year governance rank-
ings. The highest ranked markets are the UK (7.388), followed by Canada (7.346),
Ireland (7.344), and the USA (7.212). In emerging markets, South Africa records
the highest score with an average overall rating of 6.306, followed by India (4.762)
and Malaysia (4.462). The bottom end of emerging markets is occupied by China
(3.168) and Indonesia (3.396). Singapore’s average rating of 5.268 ranks the highest
among the Asian markets (Table 1).

3.3. Descriptive Statistics

Descriptive statistics for the sample are reported in Table 2. Definitions and
sources for variables are shown in Appendix A. Proportions of religious affilia-

4
Countries that the GMI does not measure each year from 2006 to 2010 are excluded from
our sample.

© 2016 Korean Securities Association 289

J. Kim and S. J. Daniel

tion in each country are shown in Appendix B. The mean (median) of country-
level governance score (GOV) is 5.150 (4.925). The proportion of Protestants
(PERCENTPROT) has a mean (median) value of 0.210 (0.054). The mean
(median) of the proportion of Catholics (PERCENTCATH) is 0.305 (0.089). The
mean (median) of the proportion of Buddhists (PRCENTBUD) and the mean
(median) of the proportion of Muslims (PERCENTMUS) are 0.040 (0.003) and
0.088 (0.017), respectively. The mean (median) of the proportion of people who
are not Protestants, Catholics, Buddhists, or Muslims (PERCENTOTHER) is
0.357 (0.338). Rule of law (RL) has a mean (median) value of 1.067 (1.382).
The mean (median) of the corrected antidirector rights index (INVPRO) is
4.031 (4.000). The higher value of INVPRO represents stronger investor protec-
tion against managerial self-dealing. The mean (median) of natural log of GDP
per capita (LNGDP) and the mean (median) of stock market capitalization
divided by GDP (STOCKMARKET) are 9.985 (10.385) and 1.056 (0.833), respec-
tively. Collectivism (COLLECT), power distance (POWDI), uncertainty avoidance
(UNAV), and gender egalitarianism (GENDER) have means (medians) of 4.375
(4.310), 5.078 (5.075), 4.428 (4.325), and 3.339 (1.435), respectively.

3.4. Correlation
In Table 3, we find a significantly positive correlation between PERCENTPROT
and GOV. Although the correlation between PERCENTCATH and GOV is posi-
tive, it is not significant. PERCENTBUD, PERCENTMUS, and PERCENTOTHER
are significantly negatively correlated with GOV. We find a significantly positive
correlation between PROT and GOV. CATH is positively correlated with GOV;
however, it is not significant. BUD, MUS, and OTHER are significantly negatively
correlated with GOV. There is a significantly positive correlation between GOV
and COMMONLAW, between GOV and RL *INVPRO, and between GOV and
LNGDP. Though we find a positive correlation between STOCKMARKET and
GOV, there is no statistical significance. A correlation between COLLECT and
GOV is positive, but not significant. A correlation between POWDI and GOV is
negative and significant. UNAV and GENDER are significantly positively corre-
lated with GOV. Because these univariate comparisons do not control for corre-
lated factors that potentially influence corporate governance, the results only
provide preliminary evidence to our hypothesis and should be interpreted with
caution.

3.5. Results
Table 4 shows the univariate test results. The mean of GOV in Protestant countries
is higher than that of GOV in non-Protestant countries. The difference between
them, namely 1.337, is significant. The mean of GOV in Protestant countries is
higher than that of GOV in Catholic countries. The difference between them,
namely 0.742, is significant. The mean of GOV in Protestant countries is signifi-

290 © 2016 Korean Securities Association

 Religion and Corporate Governance

Table 1 Descriptive statistics of the country-level governance score (GOV) by country

Mean is the average of country-level governance scores (GOV) in each country, which GMI measures
from 2006 to 2010. Median is the median of GOV in each country, which GMI measures from 2006 to
2010. Minimum is the minimum of GOV in each country, which GMI measures from 2006 to 2010.
Maximum is the maximum of GOV in each country, which GMI measures from 2006 to 2010. Standard
deviation is the standard deviation of GOV, which GMI measures from 2006 to 2010.

Standard
Country Mean Median Minimum Maximum deviation

Australia 7.192 7.250 6.650 7.500 0.320

Austria 5.442 5.610 4.940 5.770 0.338
Brazil 3.882 4.010 3.230 4.180 0.378
Canada 7.346 7.350 7.310 7.380 0.027
China 3.168 3.180 2.940 3.370 0.192
Denmark 4.660 4.630 4.420 4.980 0.229
Finland 6.282 6.380 6.000 6.410 0.176
France 4.550 4.530 4.430 4.700 0.110
Germany 5.814 5.730 5.660 6.150 0.194
Greece 3.816 4.110 2.520 4.400 0.758
Hong Kong 4.434 4.290 4.020 5.080 0.456
India 4.762 4.670 4.540 5.080 0.226
Indonesia 3.396 3.270 2.970 3.830 0.384
Ireland 7.344 7.390 7.130 7.550 0.171
Israel 3.776 3.850 3.500 3.880 0.158
Italy 5.552 5.600 5.250 5.950 0.280
Japan 3.646 3.340 3.300 4.260 0.455
Korea, South 3.566 3.840 2.310 4.050 0.714
Malaysia 4.462 4.400 4.210 4.740 0.255
Mexico 3.450 3.040 2.430 5.100 1.166
Netherlands 6.532 6.510 6.410 6.690 0.114
New Zealand 6.616 6.670 6.420 6.790 0.152
Portugal 4.370 4.360 4.140 4.640 0.179
Singapore 5.268 5.070 4.820 5.770 0.417
South Africa 6.306 6.340 6.090 6.490 0.146
Spain 4.276 4.000 3.770 4.910 0.508
Sweden 5.654 5.610 5.450 5.880 0.211
Switzerland 5.850 5.860 5.610 6.210 0.253
Taiwan, China 4.388 4.450 3.840 4.710 0.327
Turkey 4.386 4.250 3.620 5.150 0.686
United Kingdom 7.388 7.360 7.280 7.600 0.128
United States 7.212 7.220 7.160 7.250 0.041
Overall GOV 5.150 4.925 2.310 7.600 1.367

© 2016 Korean Securities Association 291

J. Kim and S. J. Daniel

Table 2 Descriptive statistics

Standard
Variable N Mean P25 Median P75 deviation

GOV 160 5.150 4.065 4.925 6.348 1.367

PERCENTPROT 160 0.210 0.014 0.054 0.353 0.274
PERCENTCATH 160 0.305 0.016 0.089 0.687 0.358
PERCENTBUD 160 0.040 0.000 0.003 0.009 0.106
PERCENTMUS 160 0.088 0.002 0.017 0.039 0.202
PERCENTOTHER 160 0.357 0.084 0.338 0.580 0.303
COMMONLAW 160 0.375 0.000 0.000 1.000 0.486
PROT 160 0.313 0.000 0.000 1.000 0.465
CATH 160 0.344 0.000 0.000 1.000 0.476
BUD 160 0.094 0.000 0.000 0.000 0.292
MUS 160 0.094 0.000 0.000 0.000 0.292
OTHER 160 0.156 0.000 0.000 0.000 0.364
RL 160 1.067 0.401 1.382 1.769 0.825
INVPRO 160 4.031 4.000 4.000 5.000 1.049
LN(GDP) 160 9.985 9.405 10.385 10.695 1.018
STOCKMARKET 160 1.056 0.492 0.833 1.326 0.963
COLLECT 160 4.375 4.023 4.310 4.658 0.433
POWDI 160 5.078 4.923 5.075 5.335 0.363
UNAV 160 4.428 3.963 4.325 4.848 0.570
GENDER 160 3.339 0.973 1.435 1.603 0.323

cantly higher than the means of GOV in countries that are primarily Buddhist, Isla-
mic, or other.
Table 5 presents the regressions of country-level corporate governance on
PERCENTPROT, PERCENTCATH, PERCENTBUD, and PERCENTMUS. The
basic regression result in Model 1 shows that PERCENTPROT is positively asso-
ciated with GOV at a 1% significance level. The coefficient on COMMONLAW
is positive and highly significant. RL*INVPRO is positively related to GOV, but
not significant. LNGDP is positively associated with GOV at the 10% signifi-
cance level. There is a negative association between STOCKMARKET and GOV
at the 1% significance level. COLLECT is negatively associated with GOV at the
1% significance level, which means that countries with higher collectivism exhibit
weaker corporate governance. The coefficient on UNAV is positive and margin-
ally significant. In Model 2, there is a positive, but not significant, association
between PERCENTCATH and GOV. In Model 3, which incorporates PERCENT-
PROT and PERCENTCATH, PERCENTPROT is positively associated with GOV
at the 1% significance level and PERCENTCATH is positively associated with

292 © 2016 Korean Securities Association

 Table 3 Pearson correlation
The darkest, middle, and lightest shades indicate statistical significance at the 1%, 5%, and 10% levels, respectively.

© 2016 Korean Securities Association

Religion and Corporate Governance

293
J. Kim and S. J. Daniel

Table 4 Univariate test results

To determine whether corporate governance differs across countries with different primary religions, we
calculate the difference in the mean value of corporate governance between Protestant countries and
non-Protestant countries; between Protestant countries and Catholic countries; between Protestant coun-
tries and Buddhist countries; between Protestant countries and Islamic countries; and between Protestant
countries and other countries. Non-Protestant countries mean all countries whose primary religion is not
Protestantism. Other countries mean all countries whose primary religion is not Protestantism, Catholi-
cism, Buddhism, or Islam.We determine the statistical significance of the difference using the t-test. *,
**, *** denote p < 0.1, p < 0.05, p < 0.01, respectively.

Variable Protestant Non-Protestant Difference

GOV 6.069 4.732 1.337***

Variable Protestant Catholic Difference
GOV 6.069 5.327 0.742***
Variable Protestant Buddhism Difference
GOV 6.069 4.434 1.635***
Variable Protestant Islam Difference
GOV 6.069 4.081 1.988***
Variable Protestant Other Difference
GOV 6.069 3.991 2.078***

GOV at the 10% significance level. In Model 3, we compare the coefficient on

PERCENTPROT to the coefficient on PERCENTCATH; the F-test indicates that
the coefficient on PERCENTPROT is significantly larger than the coefficient on
PERCENTCATH. In Model 4, we incorporate PERCENTPROT, PERCENTCATH,
PERCENTBUD, and PERCENTMUS. PERCENTPROT has a significantly positive
coefficient at the 1% significance level. PERCENTCATH is positively related to
GOV at the 5% significance level. The coefficients on PERCENTBUD and PER-
CENTMUS are positive, but not significant. The coefficient on COMMONLAW
is also positive and highly significant. COLLECT is significantly negatively associ-
ated with GOV at the 1% significance level. UNAV has a positive coefficient at
the 5% significance level, which means that countries in higher uncertainty
avoidance show stronger corporate governance. Model 4 yields an adjusted R2
value of 68%, implying that this model explains a significant proportion of the
variation in corporate governance practices; concerns about the omitted variable
bias are mitigated to some extent. In Model 4, we compare the coefficient on
PERCENTPROT to the coefficient on PERCENTCATH; the F-test indicates that
the coefficient on PERCENTPROT is significantly larger than that on PERCENT-
CATH. To address concerns of multi-collinearity that may be present in the
models, we computed variance inflation factors (VIF) for all variables in each

294 © 2016 Korean Securities Association

 Table 5 Regression of corporate governance score (GOV) on proportion of Protestants (PERCENTPRO) and Catholics (PERCENTCAT) in each co-
untry
T-statistics obtained from clustering by country are in brackets. *, **, *** denote p < 0.1, p < 0.05, p < 0.01, respectively.

Model 1 Model 2 Model 3 Model 4

PERCENTPROT 1.742 (3.276)*** 2.151*** (4.015) 2.736 (2.759)***

PERCENTCATH 0.344 (0.763) 0.821* (1.899) 1.203 (2.036)**
PERCENTBUD 1.708 (0.919)

© 2016 Korean Securities Association

PERCENTMUS 0.649 (0.992)
COMMONLAW 1.733(4.377)*** 1.621 (3.964)*** 1.790 (4.891)*** 1.897 (5.067)***
RL*INVPRO 0.034 (0.402) 0.057 (0.580) 0.047 (0.515) 0.064 (0.652)
LNGDP 0.444 (1.952)* 0.414 (1.443) 0.331 (1.362) 0.273 (0.990)
STOCKMARKET 0.380 (3.006)*** 0.360 (2.639)*** 0.315 (2.418)** 0.296 (2.474)**
COLLECT 0.949 (3.879)*** 0.538 (1.755)* 0.783 (3.531)*** 1.057 (2.838)***
POWER 0.249 (0.351) 0.432 (0.669) 0.434 (0.641) 0.575 (0.889)
UNAV 0.471 (1.929)* 0.729 (2.695)*** 0.384 (1.953)* 0.383 (1.697)*
GENDER 0.488 (1.257) 0.151 (0.303) 0.698 (2.058)** 0.789 (2.579)***
CONSTANT 5.023 (0.960) 2.363 (0.411) 6.945 (1.347) 9.240 (1.774)*
YEAR FIXED EFFECTS YES YES YES YES
SAMPLE SIZE 160 160 160 160
ADJUSTED R SQUARE 0.651 0.597 0.675 0.680
Coefficient difference
PPERCENTPROT
VS
PPERCENTCATH
F-VALUE F(2,31) = 8.18 F(2,31) = 3.81
PROB>F 0.001 0.033
Religion and Corporate Governance

295
J. Kim and S. J. Daniel

specification. All factors are within acceptable ranges, the largest VIF of 5.58
being on RL *INVPRO.5 6 7

4. Robustness Check
Kumar et al. (2011) propose that the dominant local religion affects the local cul-
ture, which in turn influences the decision making of individuals, though they do
not participate in the activity of the dominant local religion. Stulz and Williamson
(2003) define the primary religion as the one practiced by the largest portion of the
population of a country and note that the primary religion should have a unique
influence on a country.8 Thus, we examine how the dominant religion in each
country affects corporate governance practices.
In Table 6, the basic regression result in Model 1 shows that PROT is positively
associated with GOV at the 5% significance level. The coefficient on LNGDP is pos-
itive and marginally significant. There is a negative association between STOCK-
MARKET and GOV at the 1% significance level. COLLECT is negatively related to
GOV at the 1% significance level, whereas UNAV is positively associated with GOV
5
When we drop COMMONLAW and INVPRO, we find that PERCENTPROT is positively
but insignificantly related to GOV except in Model 3 where we find that the coefficient on
PERCENTPROT is positive and marginally significant. However, dropping INVPRO and con-
trolling for COMMONLAW, PERCENTPROT is positively associated with GOV at the 1%
significance level in every model; controlling for COMMONLAW increases the adjusted R-
square by around 20% in every model. In sum, the results are robust, indicating that PER-
CENTPROT is significantly positively associated with GOV when only COMMONLAW is
controlled for, though the coefficient on PERCENTPROT is marginally significant in only
Model 3 when neither COMMONLAW nor INVPRO is controlled for.
6
Countries are divided into market-based and bank-based financial systems (Kwok and
Tadesse, 2006). We regress GOV on PERCENTPROT, control variables, and MARKET, which
is equal to 1 if the country has a market-based financial system and 0 if the country has a
bank-based financial system. We find that the coefficients on PERCENTPROT are positive at
the 5% significance level in Model 1 and positive at the 1% significance level in Models 3
and 4. When we restrict our sample to bank-based economies, we find that in Models 1 and
3, the coefficients on PERCENTPROT are positive and highly significant. However, we do
not find significance for PERCENTPROT in Models 4. In sum, PERCENTPROT is signifi-
cantly positively related to GOV when MARKET is controlled for, though the coefficients on
PERCENTPROT are not significant in all models.
7
GMI corporate governance scores change from year to year. The anti-director index (La
Porta et al., 1998) is used very commonly in the literature. We regress the anti-director index
on key independent and control variables cross-sectionally each year and in panel data across
all years. We find that the coefficient on PERCENTPROT is positive at the 1% significance
level in every model. In sum, PERCENTPROT is significantly positively associated with the
anti-director index.
8
Stulz and Williamson (2003) suggest that the impact of religion does not increase linearly
with the portion of the population of a country practicing it.

296 © 2016 Korean Securities Association

 Table 6 Regression of corporate governance score (GOV) on primary religion in each country
T-statistics obtained from clustering by country are in brackets. *, **, *** denote p < 0.1, p < 0.05, p < 0.01, respectively.

Model 1 Model 2 Model 3 Model 4

PROT 0.714 (2.072)** 1.296 (3.998)*** 1.725 (3.649)***

CATH 0.347 (1.191) 1.048 (2.920)*** 1.445 (3.037)***
BUD 0.641 (1.233)
MUS 0.673 (1.274)

© 2016 Korean Securities Association

COMMONLAW 1.484 (3.431)*** 1.669 (4.241)*** 1.563 (4.713)*** 1.577 (4.847)***
RL*INVPRO 0.046 (0.542) 0.054 (0.563) 0.058 (0.685) 0.072 (0.830)
LNGDP 0.425 (1.724)* 0.408 (1.441) 0.238 (1.049) 0.190 (0.764)
STOCKMARKET 0.355 (2.758)*** 0.364 (2.909)*** 0.260 (2.471)** 0.215 (2.110)**
COLLECT 0.888 (2.956)*** 0.511 (1.728)* 0.706 (2.495)** 0.856 (2.570)**
POWDI 0.406 (0.599) 0.370 (0.605) 0.532 (0.962) 0.585 (1.119)
UNAV 0.647 (2.218)** 0.730 (2.823)*** 0.546 (2.666)*** 0.518 (2.369)**
GENDER 0.232 (0.551) 0.150 (0.300) 0.489 (1.279) 0.506 (1.398)
CONSTANT 4.256 (0.791) 1.968 (0.354) 6.509 (1.368) 7.579 (1.524)
YEAR FIXED EFFECTS YES YES YES YES
SAMPLE SIZE 160 160 160 160
ADJUSTED R SQUARE 0.638 0.603 0.708 0.722
Coefficient difference
PROT
VS
CATH
F-VALUE F(2,31) = 8.23 F(2,31) = 6.70
PROB>F 0.001 0.004
Religion and Corporate Governance

297
J. Kim and S. J. Daniel

at the 5% significance level. In Model 2, CATH is positively related to GOV, but

there is no statistical significance. In Model 3, incorporating PROT and CATH,
PROT and CATH are significantly positively associated with GOV. Comparing the
coefficient on PROT to the coefficient on CATH, we find that the coefficient on
PROT is significantly larger than the coefficient on CATH. In Model 4, we regress
GOV on PROT, CATH, BUD, and MUS. PROT and CATH are positively related to
GOV at the 1% significance level. The F-test shows that the coefficient on PROT is
significantly larger than the coefficient on CATH. The coefficients on BUD and
MUS are positive, but not significant. Given concerns of multi-collinearity that may
be present in the models, we computed VIF for all variables in each specification.
All factors are within acceptable ranges, the largest VIF of 5.38 being on RL
*INVPRO.
In Table 7, we recategorize the primary religion of Germany from Protestantism
to Catholicism, the primary religion of the Netherlands from Catholicism to Protes-
tantism, the primary religion of South Korea from Protestantism to Buddhism, the
primary religion of Switzerland from Catholicism to Protestantism, and the primary
religion of the USA from Protestantism to Catholicism.9 In Models 1, 3, and 4,
PROT has a strong positive association with GOV at the 1% significance level. In
Models 3 and 4, we find that the coefficients on PROT are significantly larger than
the coefficients on CATH.

5. Conclusions and Discussion

This study is based on the theoretical arguments that suggest that informal con-
straints such as religion and culture directly influence economic activities. We sug-
gest that social norms are as important for corporate governance as legal norms. In
particular, we posit that formal institutions render corporate governance practices
mandatory, whereas the actual adherence of corporate governance practices is con-
tingent upon informal institutions or religion. We show how religion, especially
Protestantism, influences country-level corporate governance practices. We find that
the proportion of Protestants is positively related to corporate governance practices
after controlling for economic, legal, institutional, and cultural factors. We also find
that the effect of the proportion of Protestants on corporate governance is signifi-
cantly larger than the effect of the proportion of Catholics on corporate governance.
Since Weber’s (1905) controversial argument that the Protestant work ethic devel-
oped capitalism, the impact of religion on economic outcomes has been investi-

9
The percentages of Protestants and Catholics in Germany are 37.2% and 34.9%, respectively;
the percentages of Catholics and Protestants in the Netherlands are 35.5% and 27.1%, respec-
tively; the percentages of Protestants and Buddhists in South Korea are 18.9% and 15.8%,
respectively; the percentages of Catholics and Protestants in Switzerland are 44.8% and
41.6%, respectively; and the percentages of Protestants and Catholics in the USA are 24.3%
and 21.2%, respectively.

298 © 2016 Korean Securities Association

 Table 7 Regression of corporate governance score (GOV) on primary religion in each country with recategorization of the primary religion
I recategorize the primary religion of Germany from Protestantism to Catholicism, the primary religion of the Netherlands from Catholicism to Protestantism, the pri-
mary religion of South Korea from Protestantism to Buddhism, the primary religion of Switzerland from Catholicism to Protestantism, and the primary religion of the
USA from Protestantism to Catholicism. T-statistics obtained from clustering by country are in brackets. *, **, *** denote p < 0.1, p < 0.05, p < 0.01, respectively.

Model 1 Model 2 Model 3 Model 4

PROT 1.254 (3.504)*** 1.855 (5.262)*** 2.201 (4.603)***

CATH 0.248 (0.679) 1.090 (2.974)*** 1.418 (2.969)***
BUD 0.590 (1.248)

© 2016 Korean Securities Association

MUS 0.581 (1.265)
COMMONLAW 1.711 (4.550)*** 1.576 (3.732)*** 1.615 (5.185)*** 1.648 (5.733)***
RL*INVPRO 0.005 (0.064) 0.062 (0.633) 0.022 (0.260) 0.034 (0.399)
LNGDP 0.529 (2.204)** 0.405 (1.422) 0.321 (1.450) 0.274 (1.148)
STOCKMARKET 0.399 (3.861)** 0.350 (2.336)** 0.244 (2.281)** 0.216 (2.149)**
COLLECT 0.769 (3.335)*** 0.551 (1.672)* 0.446 (2.095)** 0.637 (2.246)**
POWDI 0.158 (0.281) 0.457 (0.687) 0.093 (0.190) 0.155 (0.347)
UNAV 0.534 (2.533)** 0.713 (2.498)** 0.322 (2.052)** 0.333 (1.781)*
GENDER 0.433 (1.121) 0.153 (0.304) 0.821 (2.561)** 0.789 (2.383)**
CONSTANT 1.094 (0.252) 2.708 (0.465) 4.422 (1.027) 5.433 (1.228)
YEAR FIXED EFFECTS YES YES YES YES
SAMPLE SIZE 160 160 160 160
ADJUSTED R SQAURE 0.685 0.596 0.747 0.758
Coefficient difference
PROT
VS
CATH
F-VALUE F(2,31) = 13.85 F(2,31) = 10.97
PROB>F 0.000 0.000
Religion and Corporate Governance

299
J. Kim and S. J. Daniel

gated by numerous scholars. For example, Fama and Jensen (1983), Larcker and
Tayan (2011), and Charreaux (2004) posit that religion serves a significant role in
shaping corporate governance. The social norm theory holds that social norms,
such as religion, influence individuals’ behavior. Therefore, religion may impact
economic outcomes, particularly corporate governance, through its influence on
individuals’ behavior and decision making. For example, the ICCR has recently
sought to instill its religious values into its invested firms to improve the corporate
governance of the firms in ways consistent with their values (www.iccr.org). While
it has been widely accepted to include national cultural variables in studies of eco-
nomic, financial, and business practices and outcomes, inclusion of religion has
been less common. Perhaps this is because religion can be a more controversial
topic than culture, and proposing that one religion may result in superior economic
outcomes is not considered “politically correct.” However, the empirical results of
this study demonstrate that the explanatory power of religion on corporate gover-
nance practices outweighs that of the traditional cultural and institutional variables.
Our tests show that differences in country corporate governance practices cannot be
understood properly without considering informal constraints, particularly religion.
That is, there are limits in considering corporate governance practices only with
legal, economic, institutional, and cultural factors.
A limitation of the study is that we regress measures of corporate governance
practices on country-level factors. That is, we employ a country-level regression
rather than a firm-level regression. Thus the country-level regression is subject to
omitted correlated variables (Defond et al., 2007). Another limitation is that the
GMI reports governance ratings for public firms and thus our results may not be
applicable to non-public firms. The other limitation is that the governance ratings
of thr GMI focus on the shareholder-oriented model, which does not address man-
agers’ responsibility towards stakeholders, except for shareholders.10 The share-
holder-oriented model focuses on a mono-stakeholder, namely shareholders for the
maximization of their value; the stakeholder-oriented model concentrates on multi-
stakeholders such as customer satisfaction, employee benefits, and a clean environ-
ment. Friedman (1970) expresses skepticism about firms’ survival if they are con-
cerned too much about society. He asserts that firms’ focus on shareholders’
objectives would only be advantageous to stakeholders as well as shareholders.
However, Mackey, the CEO of Whole Foods Market (Reason Magazine, 2005) indi-
cates that “In contrast to Friedman, I do not believe maximizing profits for the
investors is the only acceptable justification for all corporate actions”. Porter and
Kramer (2011) note that firms should aim for shared value creation rather than
merely advocating financial value creation. It is worthwhile for future studies to
examine the effects of religious denominations on corporate social responsibility.

10
In German firms, 82.7% of managers believe that firms belong to all stakeholders. In Japa-
nese firms, 97% believe this to be the case (Allen and Gale, 2000).

300 © 2016 Korean Securities Association

 Religion and Corporate Governance

Our findings have important implications for researchers and practitioners. We

find that religion has an important effect on corporate governance practices. The
behavioral finance literature finds that various managerial characteristics, such as
overconfidence (Malmendier and Tate, 2005), personal risk preferences (Chava and
Purnanandam, 2010), military background (Benmelech and Frydman, 2012), life
experiences (Malmendier et al., 2011), height and beauty (Graham et al., 2015), and
managerial fixed effects (Bertrand and Schoar, 2003) are related to corporate out-
comes. By showing that religion is associated with corporate governance practices,
this study contributes to the corporate governance, international business,
accounting, and finance literature. Our findings also provide insights for policy
makers interested in enhancing corporate governance. For example, policy makers
may consider strengthening formal constraints such as rule of law for countries
where there is a low proportion of Protestants, in order to improve corporate
governance.

References
Agle, B. R., and H. J. Van Buren III, 1999, God and mammon: The modern relationship,
Business Ethics Quarterly 9, pp. 563–582.
Allen, F., and D. Gale, 2000, Comparing financial systems (MIT Press, Cambridge).
Asch, S. E., 1956, Studies of independence and conformity: A minority of one against a
unanimous majority, Psychological Monographs 70, pp. 1–70.
Barro, R. J., and R. M. McCleary, 2003, Religion and economic growth across countries,
American Sociological Review 68, pp. 760–781.
Bebchuk, L. A., A. Cohen, and A. Ferrell, 2009, What matters in corporate governance ?
Review of Financial Studies 22, pp. 783–827.
Becker, G. S., 1976, The economic approach to human behavior (University of Chicago
Press, Chicago).
Benmelech, E., and C. Frydman, 2012, Military CEOs. Working paper. Harvard University.
Bertrand, M., and A. Schoar, 2003, Managing with style: The effect of managers on firm
policies. Quarterly Journal of Economics 118, pp. 1169–1208.
Boytsun, A., M. Deloof, and P. Matthyssens, 2011, Social norms, social cohension, and
corporate governance, Corporate Governance: An International Review 19, pp. 41–60.
Brandes, P., R. Dharwadkar, and G. George, 2000, Privatization in emerging economies: An
agency theory perspective, Academy of Management Review 25, pp. 650–669.
Charreaux, G., 2004, Corporate governance theories: From micro theories to national systems
theories, Working Paper, Universite de Bourgogne.
Chava, S., and A. Purnanandam, 2010, CEOs versus CFOs: incentives and corporate policies,
Journal of Financial Economics 97, pp. 263–278.
Chen, Y., E. Podolski, S. G. Rhee, and M. Veeraraghavan, 2014, Local gambling preferences,
conservative attitudes, and corporate takeovers, Journal of Financial and Quantitative
Analysis 49, pp. 77–106.
Daniel, S., J. Cieslewicz, and H. Pourjalali, 2012, The impact of national economic culture
and country-level institutional environment on corporate governance practices: Theory
and empirical evidence, Management International Review 52, pp. 365–394.

© 2016 Korean Securities Association 301

J. Kim and S. J. Daniel

Defond, M., M. Hung, and R. Trezevant, 2007, Investor protection and the information
content of annual earnings announcements: International evidence, Journal of Accounting
and Economics 43, pp. 37–67.
Dittmar, A., and J. Mahrt-Smith, 2007, Corporate governance and the value of cash holdings,
Journal of Financial Economics 83, pp. 599–634.
Djankov, S., R. La Porta, L. Florencio, and S. Andrei, 2008, The law and economics of self-
dealing, Journal of Financial Economics 88, pp. 430–465.
Doidge, C., A. Karolyi, and R. M. Stulz, 2007, Why do countries matter so much for
corporate governance?, Journal of Financial Economics 86, pp. 1–39.
Dyreng, S. D., W. J. Mayew, and C. D. Williams, 2012, Religious social norms and
corporate financial reporting, Journal of Business Finance and Accounting 39, pp.
845–875.
Fama, E. F., and M. C. Jensen, 1983, Separation of ownership and control, Journal of Law
and Economics 26, pp. 301–325.
Friedman, M., 1970, The social responsibility of business is to increase its profits, New York
Times Magazine, September 13.
Gompers, P., J. Ishii, and A. Metrick, 2003, Corporate governance and equity prices.
Quarterly Journal of Economics 118, pp. 107–155.
Governance Metrics International (GMI), 2006a, GMI governance and performance analysis
(GMI, New York).
Governance Metrics International (GMI), 2006–2010, GMI country rankings. Annual country
GMI scores were available for download from the GMI website at www.gmiratings.com
prior to their merger with MSCI.
Graham, J., C. Harvey, and M. Puri, 2015, A corporate beauty contest, Management Science,
Forthcoming.
Grier, R., 1997, The effect of religion on economic development: A cross-national study of 63
former colonies, Kyklos 50, pp. 47–62.
Grullon, G., G. Kanatas, and J. Weston, 2010, Religion and corporate (mis)behavior,
Working Paper, Rice University.
Guiso, L., P. Sapienza, and L. Zingales, 2003, People’s opium? Religion and economic
attitudes Journal of Monetary Economics 50, pp. 225–282.
Guth, J. L., J. C. Green, L. A. Kellstedt, and C. E. Smidt, 1995, Faith and the environment:
Religious beliefs and attitudes on environmental policy, American Journal of Political
Science 39, pp. 364–382.
Halek, M., and J. G. Eisenhauer, 2001, Demography of risk aversion, Journal of Risk and
Insurance 68, pp. 1–24.
Hilary, G., and K. W. Hui, 2009, Does religion matter in corporate decision making in
America?, Journal of Financial Economics 93, pp. 455–473.
Hofstede, G., G. J. Hofstede, and M. Minkov, 2010, Cultures and organizations: Software of
the mind, 3rd edn (McGraw-Hill, USA).
House, R. J., P. J. Hanges, M. Javidan, P. W. Dorfman, and V. Gupta, 2004, Culture,
leadership, and organizations: The globe study of 62 societies (Sage, London).
Jensen, M. C., and W. H. Meckling, 1976, Theory of the firm: Managerial behavior, agency
costs and ownership structure, Journal of Financial Economics 3, pp. 305–360.
Johnstone, P., and J. Mandryk, 2001, Operation world (Intervarsity Press, Westmont).

302 © 2016 Korean Securities Association

 Religion and Corporate Governance

Kaufmann, D., A. Kraay, and M. Mastruzzi, 2011, The worldwide governance indicators: A
summary of methodology, data and analytical issues, Hague Journal on the Rule of Law, 3,
pp. 220–246.
Kelman, H. C., 1958, Compliance, identification, and internalization three processes of
attitude change, Journal of Conflict Resolution 2, pp. 51–60.
Kennedy, E. J., and L. Lawton, 1998, Religiousness and business ethics, Journal of Business
Ethics 17, pp. 163–175.
Khavari, K. A., and T. M. Harmon, 1982, The relationship between the degree of
professed religious belief and use of drugs, International Journal of the Addictions 17, pp.
847–857.
Kohlberg, L., 1967, Moral and Religious Education and the Public Schools: A Developmental
View, In T. Sizer ed.: Religion and public education (Houghton Mifflin, Boston).
Kumar, A., J. K. Page, and O. G. Spalt, 2011, Religious beliefs, gambling attitudes, and
financial market outcomes, Journal of Financial Economics 102, pp. 671–708.
Kwok, C. C. Y., and S. Tadesse, 2006, National culture and financial systems, Journal of
International Business Studies 37, pp. 227–247.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 1998, Law and finance, Journal
of Political Economy 106, pp. 1113–1155.
Landes, D., 1998, The wealth and poverty of nations (W. W. Norton, New York).
Larcker, D. F., and B. Tayan, 2011, Corporate governance matters: A closer look at
organizational choices and their consequences (FT Press, Upper Saddle River, NJ).
Malmendier, U., and G. Tate, 2005, CEO overconfidence and corporate investment. Journal
of Finance 60, pp. 2661–2700.
Malmendier, U., G. Tate, and J. Yan, 2011, Overconfidence and early-life experiences: the
impact of managerial traits on corporate financial policies. Journal of Finance 66, pp.
1687–1733.
McCullough, M. E., and B. L. Willoughby, 2009, Religion, self-regulation, and self-control:
Associations, explanations, and implications, Psychological Bulletin 135, pp. 69–93.
McGuire, S. T., T. C. Omer, and N. Y. Sharp, 2012, The impact of religion on financial
reporting irregularities, The Accounting Review 87, pp. 645–673.
Milgram, S., 1963, Behavioral study of obedience, Journal of Abnormal Social Psychology 67,
pp. 371–378.
Mitton, T., 2002, A cross-firm analysis of the impact of corporate governance on the East
Asian financial crisis, Journal of Financial Economics 64, pp. 215–241.
NACD Directors Daily, 2014, Faith-based group forces governance changes at JPMorgan
Chase. Available from: http://www.americanbanker.com/news/consumer-finance/faith-
based-group-forces-governance-changes-at-jpmorgan-chase-1071685-1.html
Peng, M.W., B. Trevor, and F. Igor, 2003, Do outside directors and new managers help
improve firm performance? An exploratory study in Russian privatization, Journal of
World Business 38, pp. 348–361.
Peng, M. W., 2004, Outside directors and firm performance during instituional transitions,
Strategic Management Journal 25, pp. 453–471.
Porter, M. E., and M. R. Kramer, 2011, The big idea: Creating shared value, Harvard Business
Review 89, pp. 62–77.
Reason Magazine, 2005, Rethinking the social responsibility of business. Available from:
http://reason.com/archives/2005/10/01/rethinking-the-social-responsi

© 2016 Korean Securities Association 303

J. Kim and S. J. Daniel

Ronen, S., and O. Shenkar, 2013, Mapping world cultures: Cluster formation, sources and
implications, Journal of International Business Studies 44, pp. 867–897.
Saroglou, V., and A. B. Cohen, 2011, Psychology of culture and religion: Introduction to the
JCCP special issue, Journal of Cross-Cultural Psychology 42, pp. 1309–1319.
Smith, R. E., G. Wheeler, and E. Diener, 1975, Faith without works: Jesus people, resistance
to temptation, and altruism, Journal of Applied Social Psychology 5, pp. 320–330.
Spamann, H., 2010, The “antidirector rights index” revisited, Review of Financial Studies 23,
pp. 467–486.
Stulz, R. M., and R. Williamson, 2003, Culture, openness, and finance, Journal of Financial
Economics 70, pp. 313–349.
Tajfel, H., 1981, Social Stereotypes and Social Groups, In J. C. Turner, H. Giles eds:
Intergroup behaviour (Blackwell, Oxford).
Terpstra, D. E., E. J. Roxell, and R. K. Robinson, 1993, The influence of personality and
demographic variables on ethical decisions related to insider trading, Journal of Psychology
127, pp. 375–389.
Tomes, N., 1985, Religion and the earnings function, American Economic Review 75, pp. 245–
250.
Vitell, S., 2009, The role of religiosity in business and consumer ethics: A review of the
literature, Journal of Business Ethics 90, pp. 155–167.
Volont
e, C., 2015, Culture and corporate governance: The influence of language and religion
in Switzerland, Management International Review 55, pp. 77–118.
Walsh, B., 2015, The Pope’s overlooked legacy: Reforming the Vatican bank. Huffington
Post, retrieved from http://www.huffingtonpost.com/entry/pope-vatican-bank_us_
56031658e4b00310edf9e8d9 (accessed September 24, 2015).
Weber, M., 1905, The Protestant ethic and the spirit of capitalism (Routeldge, London and
New York).
Williamson, O. E., 2000, The new institutional economics: Taking stock, looking ahead,
Journal of Economic Literature 38, pp. 595–613.
Young, M. N., M. W. Peng, D. Ahlstrom, G. D. Bruton, and Y. Jiang, 2008, Corporate
governance in emerging economies: A review of the principal–principal perspective,
Journal of Management Studies 45, pp. 196–220.
Zheng, X., S. El Ghoul, O. Guedhami, and C. C. Y. Kwok, 2012, National culture and
corporate debt maturity, Journal of Banking and Finance 36, pp. 468–488.

304 © 2016 Korean Securities Association

 Religion and Corporate Governance

Appendix A. Variable, source, and definition

Variable Source Definition

GOV Governance Metrics A higher score indicates a

International (GMI) higher level of a country-
level corporate governance
score
PERCENTPROT Stulz and Williamson Proportion of Protestants in
(2003), Johnstone a country
and Mandryk (2001)
PERCENTCATH Stulz and Williamson Proportion of Catholics in a
(2003), Johnstone country
and Mandryk (2001)
PERCENTBUD Stulz and Williamson Proportion of Buddhists in a
(2003), Johnstone country
and Mandryk (2001)
PERCENTMUS Stulz and Williamson Proportion of Muslims in a
(2003), Johnstone country
and Mandryk (2001)
PERCENTOTHER Stulz and Williamson Proportion of people who
(2003), Johnstone are not Protestants,
and Mandryk (2001) Catholics, Buddhists, or
Muslims in a country
PROT Stulz and Williamson Dummy variable equal to 1
(2003) Johnstone and if a country’s primary
Mandryk (2001) religion is Protestantism
CATH Stulz and Williamson Dummy variable equal to 1
(2003), Johnstone if a country’s primary
and Mandryk (2001) religion is Catholicism
BUD Stulz and Williamson Dummy variable equal to 1
(2003), Johnstone if a country’s primary
and Mandryk (2001) religion is Buddhism
MUS Stulz and Williamson Dummy variable equal to 1
(2003), Johnstone if a country’s primary
and Mandryk (2001) religion is Islam
OTHER Stulz and Williamson Dummy variable equal to 1
(2003), Johnstone if a country’s primary
and Mandryk (2001) religion is not
Protestantism, Catholicism,
Buddhism, or Islam

© 2016 Korean Securities Association 305

J. Kim and S. J. Daniel

Appendix A (Continued)

Variable Source Definition

RL Kaufmann et al. Rule of law. A higher score

(2011) indicates a higher level of
the rules of society
INVPRO Spamann (2010) Corrected anti-director
index. A higher score
indicates a higher level of
investor protection
RL*INVPRO Interaction term of RL and
INVPRO
COMMONLAW La Porta et al. (1998) Dummy variable equal to 1
if a country has common
law origin
LNGDP World Bank Databank Natural log of GDP per
capita
STOCKMARKET World Bank Databank Stock market capitalization
divided by GDP
COLLECT GLOBE database Collectivism
POWDI GLOBE database Power distance
UNAV GLOBE database Uncertainty avoidance
GENDER GLOBE database Gender egalitarianism

Note: Because there is no proportion value for religious affiliation in China in Stulz
and Williamson (2003), we get the proportion value for China from Johnstone and
Mandryk (2001).

306 © 2016 Korean Securities Association

 Appendix B. Country characteristics

PERCENT PRECENT PERCENT PERCENT PERCENT

Country Religion GOV PROT CATH MUS BUD OTHER

Australia Protestant 7.192 36.7 28.1 1.1 1.1 33

Austria Catholic 5.442 5.9 76.6 2 0.1 15.4
Brazil Catholic 3.882 17.6 82.1 0.1 0.2 0

© 2016 Korean Securities Association

Canada Catholic 7.346 20.3 41.9 1 0.7 36.1
China Local Beliefs 3.168 0.05 0.57 2 8.38 89
Denmark Protestant 4.660 88.4 0.6 1.2 0 9.8
Finland Protestant 6.282 89.8 0.1 0.2 0.1 9.8
France Catholic 4.550 1.6 82.8 7 0.7 7.9
Germany Protestant 5.814 37.2 34.9 4 0.1 23.8
Greece Greek Orthodox 3.816 0.2 0.6 3.3 0 95.9
Hong Kong Local Beliefs 4.434 5 5 0 0 90
India Hindu 4.762 3 1.5 11.9 0.7 82.9
Indonesia Muslim 3.396 5.7 2.7 54.7 0.9 36
Ireland Catholic 7.344 4.5 85.2 0.2 0 10.1
Israel Judaism 3.776 0.4 2.7 12.2 0 84.7
Italy Catholic 5.552 0.8 97.2 1.1 0 0.9
Japan Buddhist 3.646 0.5 0.4 0.1 55.4 43.6
Korea, South Protestant 3.566 18.9 7.8 0.2 15.8 57.7
Malaysia Muslim 4.462 3.8 3.2 47.7 6.6 38.7
Mexico Catholic 3.450 3.5 93.8 0.3 0 2.4
Netherlands Catholic 6.532 27.1 35.5 3.7 0.5 33.2
Religion and Corporate Governance

307
 308
Appendix B (Continued)
J. Kim and S. J. Daniel

PERCENT PRECENT PERCENT PERCENT PERCENT

Country Religion GOV PROT CATH MUS BUD OTHER

New Zealand Protestant 6.616 46.6 13.1 0.2 0.9 39.2

Portugal Catholic 4.370 1.3 91.3 0.2 0.5 6.7
Singapore Buddhist 5.268 5.01 4.21 14.9 42.5 33.38
South Africa Protestant 6.306 31.1 8.2 2.4 0.1 11
Spain Catholic 4.276 0.3 96.2 0.5 0 3
Sweden Protestant 5.654 94.8 1.9 2.1 0 1.2
Switzerland Catholic 5.850 41.6 44.8 2.5 0.1 11
Taiwan, China Buddhist 4.388 1.8 1.4 0.4 21 75.4
Turkey Muslim 4.386 0.1 0.1 97.2 0.1 2.5
United Kingdom Protestant 7.388 53.8 9.6 1.9 0.3 34.4
United States Protestant 7.212 24.3 21.2 1.4 0.8 52.3

© 2016 Korean Securities Association