Religiosity, shareholder lawsuits, and employee whistleblowing

Abstract

In this paper, we investigate how the level of religiosity in the area in which a firm is headquartered affects the incidence of shareholder lawsuits and employee whistleblowing. We argue that the local religiosity promotes an environment in which employees are prone to be more truthful and therefore more likely to whistleblow if their managers make untruthful disclosures and/or unethical decisions. As a result, firm shareholders are more likely to trust firm decisions by giving them a benefit of the doubt, which mitigates the prospective elements of the harmful deed and fraudulent intent associated with shareholder lawsuits. Furthermore, we find that monetary incentives are positively related to employee whistleblowing. We also find that when external monitoring is weaker, the effect of religiosity on lawsuits and whistleblowing is more pronounced. Collectively, these results are consistent with religiosity inducing a corporate environment with enhanced whistleblowing and ethical managerial decisions, leading to fewer outside shareholder lawsuits.