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Does Religion Matter to Owner-Manager Agency Costs? Evidence from China

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Abstract

In China, Buddhism and Taoism are two major religions. Using a sample of 10,363 firm-year observations from the Chinese stock market for the period of 2001–2010, I provide strong and robust evidence that religion (i.e., Buddhism and Taoism on the whole) is significantly negatively associated with owner-manager agency costs. In particular, using firm-level religion data measured by the number of religious sites within a radius of certain distance around a listed firm’s registered address, I find that religion is significantly negatively (positively) associated with expense ratio (asset utilization ratio), the positive (reverse) proxy for owner-manager agency costs. This finding is consistent with the following view: religiosity has remarkable effects on the way how an individual thinks and behaves, and thereof can curb managers from unethical business practices. Moreover, my findings suggest that the negative association between religion and owner-manager agency costs is attenuated for firms with strong external monitoring mechanisms such as higher Marketization and high-quality auditors. Furthermore, after separating Buddhism from Taoism, my finding indicates that above conclusions are only available for Buddhism, suggesting that different religions may have asymmetric influence on owner-manager agency costs. Above results are robust to various measures of religiosity and a variety of robustness checks.

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Notes

  1. In this paper, I adopt expense ratio (asset utilization ratio) as the positive (negative) proxy for agency costs between management and shareholders. Ang et al. (2000), Dang and Fang (2011), and Singh and Davidson (2003) can lend support to my proxies for agency costs. Expense ratio is used to measure the efficiency that management controls operating costs, including “excessive perquisite consumption and other direct agency costs”; Asset utilization ratio is used to measure the efficiency of managers’ deploying a firm’s assets (Ang et al. 2000).

  2. If one person serves as the CEO and the chairman of the board simultaneously, he/she will own more managerial power (Bebchuk et al. 2002; Core et al. 2008).

  3. Note that I also tighten and relax the upper limit and adopt other criteria in 20 km and 50 km apart (e.g., 120, 140, 150, 160, 180, 220, 240, 250, 260, 280) and use the same procedure to define corresponding religious variables for robustness checks.

  4. In addition, I also use province-level religious variables to conduct robustness checks.

  5. Twenty-two provinces include Heilongjiang, Jilin, Liaoning, Hebei, Henan, Shandong, Jiangsu, Shanxi, Shaanxi, Gansu, Sichuan, Qinghai, Hunan, Hubei, Jiangxi, Anhui, Zhejiang, Fujian,Guangdong,Guizhou, Yunnan, and Hainan; Four municipalities include Beijing, Shanghai, Tianjin, and Chongqing; Five autonomous regions of minority nationalities refer to Guangxi Zhuang Autonomous Region, Xizang (Tibet) Autonomous Region, Ningxia Hui Autonomous Region, Inner Mongolia Autonomous Region, and Xinjiang Uygur Autonomous Region.

  6. Article 36 of the 1982 Constitution notes clearly that: “Citizens of the People’s Republic of China enjoy freedom of religious belief. No state organ, public organization or individual may compel citizens to believe in, or not to believe in, any religion: nor may they discriminate against citizens who believe in, or do not believe in any religion. The state protects normal religious activities”.

  7. The results remain qualitatively similar if I introduce the dummy variable of CROSS in Eqs. (1) and Eq. (2) to include firm-years that issue shares to foreign investors.

  8. The results are not qualitatively changed by deleting the top and the bottom 1 % of the sample, by no deletion, or by no winsorization.

  9. In fact, the Chinese audit market is highly competitive and high quality auditors own a relatively lower market shares. For example, the market share of the Big 4 (in listed firms) in China from 2003 to 2008 was 17, 21, 25, 28, 33, and 33 %, respectively. However, according to Choi and Wong (2007), the market share of the Big 5 is 79.61 % in Australia, 90.98 % in Denmark, 82.05 % in Finland, 87.02 % in Hong Kong, 57.96 % in Taiwan, 62.13 % in Thailand, and 95.79 % in the United States.

  10. Because the time period is relatively short and my sample comprises cross-sectional data, the robust method of Newey and West (1987) and White (1980) will underestimate systematically standard errors and overestimate the significance of coefficient. Petersen (2009) argues that for data with a shorter period and many cross-sectional observations, it is suitable to directly adjust standard errors for clustering. It is worthy noting that the significances of all variables in Tables 4, 5, 6, 7, 8, 9, and 10 will be greatly improved if I adopt White (1980) or Newey and West (1987) method.

  11. Managers’ unethical behaviors include that managers award themselves excessive salaries or spend money lavishly on entertainment, travel, and other perquisites.

  12. I thank one referee for his/her reminding me the tendency on the absolute magnitude of the coefficients on RELIGION100, RELIGION200, and RELIGION300.

  13. The tabulated results for the robustness checks are available from the author upon request (similarly hereinafter).

  14. Please note that index of starting a business, index of registering property, and index of enforcing contracts are based on the indexes of “the ease of doing business in China” provided by the World Bank (2008), and I handle-collected data of CEOs’ political connections.

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Acknowledgments

I am especially grateful to the editor (Professor Domenec Mele) and two anonymous reviewers for their many insightful and constructive suggestions. I acknowledge the National Natural Science Foundation of China for financial support (approval number 71072053). I also thank Quan Zeng for excellent research assistance and Yingjie Du, Wentao Feng, and Hongmei Pei for their help to collect data.

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  1. Center for Accounting Studies and Accounting Department, School of Management, Xiamen University, No. 422, Siming South Road, Xiamen, 361005, Fujian, China

    Xingqiang Du

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Appendix

Appendix

See Table 11.

Table 11 Variables definitions
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Du, X. Does Religion Matter to Owner-Manager Agency Costs? Evidence from China. J Bus Ethics 118, 319–347 (2013). https://doi.org/10.1007/s10551-012-1569-y

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