Discussion - an examination of the stockholder response to corporate

Chapter VI: Discussion

operational quality with higher stock returns than non-religious companies with a lower degree of operational quality. From my research, I concluded that religion does have implications at the individual and business level, and I wanted to extend that examination to the behavior of the stock market, specifically to ask the question if religious

implications at the corporate level are rewarded by stockholders.

I also examined prior research on earnings management theory to understand some of the different forms of manipulation, learn about management incentives to manipulate earnings, and note how religion affects managers’ decisions regarding accruals and financial reporting decisions. Through my research, I learned that religious social norms act as a monitoring mechanism over financial reporting and that companies in highly religious communities tend to have less aggressive financial reporting. I noted some of the different ways managers can manipulate accruals to meet earnings

expectations and receive handsome awards from compensation packages. Due to religious reminders and religious risk aversion, I learned that companies in highly

religious areas tend to favor real earnings management to accruals earnings management.

Thus, I hypothesized that stockholders reward highly religious companies that have less accruals earnings management with higher stock returns than non-religious companies with a high level of accruals earnings management.

In order to test my hypotheses, I used religiosity data provided by Dr. William Mayew from the years 1999 and 2006. I noted how stockholders respond to the

operational quality of religious companies by examining the mean stockholder returns by varying levels of religiosity and IAROA. In a similar fashion, I noted how stockholders respond to the financial reporting quality of religious companies by examining the mean

stockholder returns by varying levels of religiosity and IAACC. I also examined industries and auditors by their client bases using the corporate religiosity data for the purpose of gaining a better understanding of the effects of religiosity in the world and on the auditing profession. The results of the industry and auditor examination are in the Item Analysis section in Chapter V.

Conclusion

In my test examining the stockholder response to religiosity and operational quality, I viewed the mean stock returns by religiosity and operational efficiency for 1999 and 2006 as discussed in the item analysis section in Chapter V. In 1999, the results were not as I expected. From prior research, it seemed reasonable to conclude that the highest stock return would come from the most religious and most operationally efficient

companies. However, that hypothesis is not correct for 1999. In 1999, the least religious companies boasted the highest stock returns across all levels of operating efficiency, and the highest stock return came from the least religious and most operationally efficient companies. In 2006, my hypothesis is correct and is the same as the results from my test;

the highest stock returns came from the most religious and most operationally efficient companies. As noted in the Item Analysis, it appears that the stock return did not increase significantly for the religious companies but that the stock return decreased significantly for the least religious companies.

The reason why stockholders favored the least religious companies in 1999 is not clear to me. However, I pose a couple possible explanations for the change in 1999 – from stockholders favoring the least religious companies – to 2006 – where stockholders

favored the most religious and most operationally efficient companies and significantly decreased their favor toward the least religious companies. One possibility is that the Sarbanes-Oxley Act of 2002 (SOX) and frauds leading to the need for SOX changed the perception of corporate responsibility to investors and changed the way corporate

management operates. It raised the standards for public companies. It also created more oversight for investors. More so than explaining why stockholders began favoring the religious company with high operational efficiency, SOX may help explain why investors began to shy away from the least religious companies with low levels of operational efficiency. Another possibility for the unexpected mean stock return switch from 1999 to 2006 may involve the changing mindset of individuals about corporate responsibility and accountability to shareholders and the environment. If there was a dramatic change in shareholder CSR support between 1999 and 2006, religious management may have made different decisions in 2006 than in 1999 to increase their ROA. If management decisions were in line with shareholder expectations, we could expect to see the stock return favoring the religious companies who made better decisions to increase their operational efficiency.

In my test examining the stockholder response to religiosity and financial reporting quality, I viewed the mean stock returns by religiosity and level of accruals earnings management for 1999 and 2006 as discussed in the item analysis section in Chapter V. Again, the results were not as I expected in 1999. Based on prior research, it seems reasonable that stockholders would reward the most religious companies with the least amount of accruals earnings management. However, in 1999, the least religious companies with the highest amount of accruals earnings management have the highest

mean stock returns. In 2006, the highest mean stock return is still with the least religious companies with the highest amount of accruals earnings management. However, as noted in the Item Analysis for 2006, the most religious companies with average accruals

management have a stock return that is almost as high as the least religious companies with the highest amount of accruals earnings management.

I can draw no clear conclusion as to why my hypothesis that stockholders would favor the most religious companies with the least amount of accruals earnings

management was not supported in either 1999 or 2006. Even though the most religious companies with average accruals management in 2006 have a stock return that is almost as high as the least religious companies with the highest amount of accruals earnings management, the mean stock return is greater for the companies with the most accruals earnings management than for the companies with the least accruals earnings

management across all religiosity levels in 1999 and 2006. It should be noted that even though the mean stock return is greater for the companies with the most accruals earnings management than for the companies with the least accruals earnings management across all religiosity levels in 1999 and 2006, the stock returns decreased significantly from 1999 to 2006.

There are some possible explanations I pose for the results of my test examining stockholder response to religiosity and financial reporting quality. First, companies with greater accruals earnings management are likely to have better financial results. If stockholders base their investment decisions purely on these improved financials without investigating company accruals and areas where management may have manipulated earnings, it is not surprising to see the mean stock returns favoring the least religious

companies with a high level of accruals earnings management. Second, as mentioned as a possible reason for my results involving religiosity and operational quality, SOX may also play a role in my results involving religiosity and financial reporting quality. SOX may help explain the decrease in mean stock return from 1999 to 2006 for the companies with the most accruals earnings management. The SOX legislation requires top

management to certify that their financial reports are accurate and requires independent auditors to review the accuracy of the financials. This increased focus on financial accuracy has the potential to decrease the mean stock return for the least religious companies’ poor accruals earnings management. Although comparable pre-SOX and post-SOX years were selected for my corporate religiosity tests, there is always a possibility that a change in the economy could have skewed my results.

Recommendations

Since the results of my tests are not as I expected, I suggest that more tests need to be performed to draw more accurate conclusions regarding stockholders’ response to corporate religiosity. Specifically, I suggest testing a few more pre-SOX and post-SOX years to see if there is a true trend towards higher stockholder returns for highly religious companies with high operational efficiency and to see if SOX has any implication for the trend toward lower mean stock returns for the companies with the most accruals earnings management. By comparing more pre-SOX and post-SOX years using the same tests I performed with IROA and IAACC, one may be able to determine if the SOX legislation is actually a factor in the changing mean stock returns and if the legislation creates a

higher degree of stockholder appreciation for more religious companies with better operational and financial reporting quality.

I also suggest that more extensive tests should be performed using the religiosity data I used in my tests. One possibility when examining the stockholder response to corporate religiosity and operational efficiency is replace ROA with Return on Net Operating Assets (RNOA). Prior research shows that RNOA is a better indicator of future profitability than ROA (Fairfield et al. 1996; Nissim and Penman 2001; Dickinson and Sommers 2012). A suggestion to improve my examination of the stockholder

response to corporate religiosity and financial reporting quality is to replace accruals with discretionary accruals. If one could use a regression model to separate accruals into nondiscretionary and discretionary accruals, a better picture of the stockholder response to religiosity and accruals earnings management could be examined. This is true because removing nondiscretionary accruals, accruals that reflect normal business conditions, and leaving discretionary accruals, accruals that reflect management decisions, allows one to evaluate the stockholder response to management’s choices alone without the noise of normal operating accruals (Keefe 2012).

Although no completely new revelations were made in this study concerning stockholders’ response to corporate religiosity, I believe this study reminds the reader of religion’s impact in many areas of life. Religion is not exclusively in the church or in the home. This research and prior research reveals that religion is also in the workplace and has the potential to affect many areas of business. By examining operational and

financial reporting quality, I was able to see two areas where religion affects management

decisions. It is my hope that further research is done on this topic to see how religion

manifests itself in corporate America and how stockholders respond to this manifestation.

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Dalam dokumen an examination of the stockholder response to corporate (Halaman 67-84)