The impact of catholic religion on earnings management: A case of Poland

This paper investigated the impact of religiosity on accrual and real earnings management. Unlike most previous studies which consider this issue in a multi‐religious setting, we use a mono‐religious setting, specifically Poland where the Roman Catholic Church holds a dominant position. Thus, we are able to study the impact of religiosity on earnings management ignoring the impact of different religious denominations magnified by cultural factors. Our study focuses on the impact the Catholic religion has on earnings management. A novelty of this study is our proxy for religiosity. We use the communicantes ratio applicable only to Catholic and Orthodox denominations. This study contributes to the literature by providing a broader picture of the impact of religiosity on earnings management. Based on a sample of Polish companies, we find that Catholicism positively (negatively) influences the level of accrual (real) earnings management. We carefully examine the issue of differences between religiosity and personal faith and highlight the problems related to selecting a proxy for religiosity. The results indicate that a firm's preferred earnings management strategy depends heavily on the values shared by the national community. The majority of previous studies find that religiosity has a negative (positive) impact on accrual (real) earnings management. We provide empirical evidence that this is not always the case. There exists a setting in which the impact of religiosity is opposite, and the mechanisms through which religiosity influences earnings management are much more complicated than what was previously assumed.