Firm’s location may indicate likelihood of fraud

COLLEGE STATION—When evaluating the risks associated with investing in a company, one telling detail might be its proximity to the Bible Belt, indicates research from the Mays Business School at Texas A&M University.

New research from accounting faculty members Sean McGuire, Thomas Omer and Nathan Sharp suggests that firms headquartered in counties where residents report that religion is important in their daily lives exhibit less aggressive financial reporting.

This is especially tr ue in small-to-medium-sized firms that have less external monitoring from financial analysts. For such companies, religion can act as a substitute for other monitoring, the professors theorize.

There is a significant association between the measure of a county’s religiosity and measures of aggressive reporting, including shareholder litigation related to accounting malfeasance, the study shows.

In fact, after accounting for other firm and county characteristics, the researchers find that an approximate 10 percent increase in the population that indicate religion is important to their daily lives results in a 48.8 percent decrease in the odds that a firm headquartered in that county is sued for accounting malfeasance.

Which states overall reported the highest numbers of residents claiming religion was important in their daily lives? The top 10 are all Bible Belt states, with Mississippi (86 percent), Alabama (84 percent) and Tennessee (79 percent) in the first three spots.

At the bottom of the list by this measure are A laska (48 percent), Vermont (46 percent) and New York (44 percent).

Texas is number 13 on the list, with 71.9 percent of residents reporting religion is important in their daily life. The religion data were collected by Gallup Inc.

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2010-08-26 digital edition

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