Does Religion Affect Capital Structure(Summary)

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    22-Dec-2015

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this is a summary of article does religion affect capital structure

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SUMMARYIn this research paper author highlighted the religion effect on capital structure. He researched about different countries region and their effect on capital structures. Firms located in Protestant counties adjust towards the target leverage at afaster speed if the firm's leverage is higher than its target leverage.In contrast, firms located in Catholic counties adjust theircapital structures at a faster pace if the firm's leverage ratio is lower than the target.

There also exist a number of studies that empirically investigate the relations between the religiosity in the location of the firm and the corporate decisions such as investments, executive compensation, and option grants tocorporate executive earnings management and tax avoidance .Specifically, this literature links the religiosity of the firms to the geographic location of the firm. More specifically, the preferences and practices associated withdebt issuance prevalent among Catholics (or Protestants) can be reflected in the practices of the firms located in Catholic (or Protestant) regions. We hypothesize that if the observations of "La Porta", "Lopez de-Silanes", "Shleifer and Vishny (1999)" are robust, and that the cultural forces are important in determining the choice of financing method, then firms in Catholic areas will use more debt than firms located in Protestant areas.

There is a statistically significant difference between the firms located in Catholic and Protestant regions, with firms in Catholic countries using more debt. Research shows that the mean leverage of the firms located in the Catholic majority counties is larger than the mean of the firms located in Protestant majority counties. Interestingly, the industry leverage for the firms in Catholic areas is also lower than that of the firms located in Protestant counties.For propensity score matching, they identify firms located in counties which have a Catholic majority and match them with firms located in counties with a Protestant majority.

Using firm level data from 25 Christian-majority countries, they test if there is any difference in the capital structures of firms situated in Catholic and Protestant countries. Results support the hypothesis that the firms located inhigh catholic Religiosity counties issue more debt, while firms located in high Protestant Religiosity counties issue less.

It appears that larger firms are more levered; industry leverage explains a significant part of the firm's leverage; firms with low market to book ratio are more levered; firms with more collateral and the resulting larger debt capacity are more levered; and firms with low profitability are also more levered. Specifically, we study the issuance decisions of the firms to test if firms located in counties with higher Catholic Religiosity issue more debt and less equity; and whether higher protestant Religiosity is related to less debt and more equity issuance.

Additionally, the research shows that a firm issues more debt and less equity if the industry's leverage is high, the firm has more collateral, and it has high lagged leverage. The results for the firms located in Catholic regions whose leverage is above the target and the results of the firms located in Protestant regions whose leverage is below the target. The regression estimates show that the adjustment speed for the firms located in Catholic regions is higher than that for the firms located in Protestant regions.

Therefore, the firms located in Catholic regions adjust towards the target at a faster speed if the firm's leverage is lower than the target.

As study shows, firms in Protestant countries tend to be more equity dependent, while the firms in Catholic areas depend more on debt to finance their investments. We compare the capital structures of firms situated in the Catholic-majority and the Protestant-majority counties within the United States and find that firms located in Catholic-majority counties have more leverage.

We also find that firms located in the Protestant counties adjust towards their target capital structure at a faster speed if the firm's leverage is higher than the target leverage. In contrast, firms located in the Catholic counties adjust their capital structures at a faster speed if the firm's capital structure is lower than the target.

This issue manifests itself in the literature's rather limited ability to explain why firms have substantially different leverage than the optimal and why some firms frequently issue debt while other firms rarely do so.

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