The Effect of Religion in European Financial Statement Disclosures: A Real Earnings’ Management Case

Abstract

Prior research has extensively examined the relationship between religion and accrual-based earnings management. However, there is currently little research on the relationship between religion and real (non-accrual) earnings management, especially in Europe. This paper aims to fill this research gap and examines whether and how the effect of religion could be linked with firms’ real earnings management activities. Four hypotheses are developed and tested, with our results providing indications that the degree of overall religiosity is negatively and significantly associated with real earnings management. Furthermore, when investigating the effects of different religions in Europe, Christianity and Islam have the opposite impact on firms’ real earnings management activities. Overall, our paper indicates that in European countries, the religious environment can mitigate firms’ manipulations on earnings.