Abstract

Previous studies substantiate that religious social norms influence individual and organizational decisions. Using debt financing settings, we examine whether a firm’s religious environment influences outside parties’ perceptions in contracting with the firm. We document that firms located in the more religious areas use less debt financing and receive better credit ratings. Bond investors require lower yields and impose fewer covenants on such firms. Using the 2002 revelation of sex abuse by Catholic priests as an exogenous shock, we verify that these findings are not driven by endogeneity issues. Our study highlights the role of social norms in financial transactions.