This paper explores the nexus between earnings management and religiosity. It complements prior research on the impact of religious social norms of the firm's environment on earnings management practices. Using a sample of 11,105 U.S. firm-year observations between 2004 and 2013, we find that religiosity is negatively associated with the accruals-based method, but positively related to both real-activities and classification shifting. This suggests that religiosity could serve as a correction mechanism to accruals earnings management practices. However, managers in highly religious areas consider real-activities and classification shifting as ethically and morally appropriate. In addition, we interact religiosity measures with governance variables to provide evidence of the importance of religion in relation to board characteristics. As part of robustness analysis we examine the impact of religion in high and low religious areas, as well as in urban and rural areas. Our findings remain robust and argue in favour of the importance of religious social norms in earnings management.

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This paper explores the nexus between earnings management and religiosity. It complements prior research on the impact of religious social norms of the firm's environment on earnings management practices. Using a sample of 11,105 U.S. firm-year observations between 2004 and 2013, we find that religiosity is negatively associated with the accruals-based method, but positively related to both real-activities and classification shifting. This suggests that religiosity could serve as a correction mechanism to accruals earnings management practices. However, managers in highly religious areas consider real-activities and classification shifting as ethically and morally appropriate. In addition, we interact religiosity measures with governance variables to provide evidence of the importance of religion in relation to board characteristics. As part of robustness analysis we examine the impact of religion in high and low religious areas, as well as in urban and rural areas. Our findings remain robust and argue in favour of the importance of religious social norms in earnings management.