The impact of religion on financial economics: a literature review

Abstract

Since around 84% of the world population is affiliated to a religion, it is sensible to think that religion exerts a profound influence on the economy. The purpose of this paper is to compile the extant literature on religion and its effect on the economy, so that it can be established whether religion is determinant in shaping financial economics. One key finding of this study is that firms located in highly religious areas are not likely to behave unethically, they appear to have less accounting risk, a lower likelihood of fraudulent accounting, and are less prone to tax sheltering. When it comes to investments, both religious and non-religious people prefer financial criteria instead of socially responsible investment criteria. However, in religions that unethical investments are frown upon, such as Islam, the influence of religiosity on investments is more noticeable. Another result of this work is that adherents to a religion seem to be more risk-averse than non-religious, even though attitudes towards gambling are different among religions. Religion does seem to impact the economy, and by extension, financial economics. Yet, in terms of corporate governance, financial investments, and entrepreneurship, just to name a few, it remains a daunting task for scholars to isolate the variables that do relate to religion, which is essential for measuring its influence.