Religion and the readability of textual financial disclosures

Previous research shows that religiosity is associated with more ethical business decisions, as well as with more conservative and less risk-prone decisions. Along this line, some research documents a positive relationship between religiosity and higher-quality accounting information, measured using different quantitative characteristics of financial information. Different from previous research, this paper focuses on the narrative sections of financial statements. Specifically, we analyze whether religiosity has any influence on the readability of annual reports. Our results show that firms located in highly religious areas provide annual reports with higher readability, consistent with the positive relationship between religiosity and financial information quality. Additionally, our results reveal that religiosity has both a direct influence on readability, which we attribute to more ethical behavior, and an indirect influence, in terms of higher risk aversion. The direct influence (ethical behavior) is stronger than the indirect one (risk aversion). • Firms located in highly religious areas provide annual reports with higher readability • Religiosity has both a direct and an indirect influence on readability • The direct influence (ethical behavior) is stronger than the indirect one (risk aversion).