Academic journal article Journal of Business Strategies

Religiosity and Corporate Illegal Activity

Academic journal article Journal of Business Strategies

Religiosity and Corporate Illegal Activity

Article excerpt

INTRODUCTION

Agency theory is the primary theoretic lens through which executive compensation and corporate governance issues are examined (Dalton, Hitt, Certo, & Dalton, 2007; Devers, Cannella, Reilly, & Yoder, 2007; Eisenhardt, 1989). This continues despite growing evidence that agency theory prescriptions may inadvertently contribute to the agency problems they were designed to solve (Dalton et al., 2007; Devers et al., 2007) such as financial fraud (e.g., Ndofor, Wesley, & Priem, 2015; O'Connor, Priem, Coombs, & Gilley, 2006) and stock option backdating (Heron and Lie, 2007; Lie, 2005). One possible way to address these issues is to follow Eisenhardt's recommendation that researchers, "use agency theory with complementary theories" (Eisenhardt, 1989, p. 71 ) because agency theory ignores organizational complexity. We follow this recommendation and offer institutional theory as an important compliment to agency theory when studying certain agency problems.

Institutions provide society with rules and standards that influence individuals and organizations, and hence, economic activity (Hitt, Ahlstrom, Dacin, Levitas, & Svobodina, 2004; North, 1990; Scott, 2001 ). Institutions affect individuals' and firms' strategic choices (Hitt et al., 2004; Peng, 2003) partly because they define acceptable behaviors within a society (DiMaggio & Powell, 1983; North, 1990; Scott, 2001). One institutional dimension of particular importance to executives and organizations is the normative dimension. Normative institutions introduce values and norms into social life that "define legitimate means to pursue valued ends" (Scott, 2001, p. 64). In particular, normative institutions not only define socially acceptable goals such as making a profit, but they also specify acceptable rules for meeting those goals (Blake & Davis, 1964). In our context, we examine how one particular normative institution, religion, influences the likelihood of socially unacceptable actions such as corporate illegal activity. The purpose of our research, then, is to integrate agency and institutional theories and demonstrate how they may act together to explain corporate illegal activity.

In doing so, we make several contributions to the literature. First, we respond to Eisenhardt (1989) by integrating agency and institutional theories to explain corporate illegal activity. Consistent with warnings that agents may look for new ways to increase their personal gain when old ways are monitored and controlled (Dow, 1987; Ghoshal & Moran, 1996), executives at many organizations have engaged in illegal actions. Agency theory prescriptions have not only failed to mitigate these actions, but may have actually contributed to them (Dalton et al., 2007; Devers et al., 2007). We posit that pressure from normative institutions may help to mitigate these actions.

Second, we develop theory to help understand how normative institutions influence social actors to not engage in corporate illegal activity. More specifically, we explain how religiosity in the geographic region in which an organization is headquartered creates social norms of honesty and risk aversion in which executives live and make decisions (Cialdini & Goldstein, 2004; Halek & Eisenhauer, 2001; Kohlberg, 1984; Sunstein, 1996).

Lastly, we extend recent work relating religiosity with legal accounting tactics such as earnings management (Callen, Morel, & Richardson, 2011 ; McGuire, Omer, & Sharp, 2012) and financial restatements (Dyreng, Mayew, & Williams, 2012), as well as investment and growth rates (Hilary and Hui, 2009) by examining the relationship between religiosity and corporate illegal activity.

LITERATURE REVIEW

Religiosity as a Normative Institution

Religion has been defined as shared beliefs, ideologies, and behaviors based on faith in a higher power, or supernatural forces (Iannaccone 1998). …

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