human resources7

Workforce Diversity and Religiosity

Jinhua Cui • Hoje Jo • Haejung Na •

Manuel G. Velasquez

Received: 20 November 2012 / Accepted: 29 November 2013 / Published online: 19 December 2013

� Springer Science+Business Media Dordrecht 2013

Abstract Workforce diversity has received increasing

amounts of attention from academics and practitioners

alike. In this article, we examine the empirical association

between a firm’s workforce diversity (hereafter, diversity)

and the degree of religiosity of the firm’s management by

investigating their unidirectional and endogenous effects.

Employing a large and extensive U.S. sample of firms from

the years 1991–2010, we find a positive association

between a measure of the firm’s commitment to diversity

and the religiosity of the firm’s management after con-

trolling for various firm characteristics. In addition, after

controlling for endogeneity with the dynamic panel gen-

eralized method of moment, we still find a positive asso-

ciation between the firm’s diversity and management’s

religiosity. We interpret these results as supportive of the

religious motivation explanation that views the firm as a

human community and considers religion as a factor that

influences managers to more positively embrace diversity.

Our results, however, provide no support for the resource-

constraint hypothesis that views the firm as a nexus of

contracts and sees managers as aiming to maximize

shareholder returns under resource constraints that force

them to invest only in projects that have a positive net

present value (NPV) and reject diversity initiatives since

these do not have a positive NPV.

Keywords Workforce diversity � Religiosity � Religious motivation hypothesis � Resource-constraint explanation

Introduction

Management interest in diversity initiatives—initiatives

that support the fuller integration into the firm of women,

persons with disabilities, racial and ethnic minorities, and

other minorities1—has grown significantly over the last

several decades. About 95 % of Fortune 1000 companies,

for example, have implemented diversity management and

diversity training programs (Chavez and Weisinger 2008)

and it has been estimated that companies spend over eight

billion dollars a year on such programs (Hansen 2003).

Corporate spending on diversity has generally been justi-

fied on the basis of what has been called the ‘‘business

case’’ for diversity which holds that diversity has signifi-

cant business advantages such as increased productivity or

increased creativity and innovation (Finkelstein and Ham-

brick 1996). Yet more than four decades of research has

failed to provide conclusive evidence that diversity gen-

erally delivers the advantages attributed to it (Noon 2007),

nor has it produced conclusive evidence that diversity

training or diversity management programs are effective

(Kalev et al. 2006; Christian et al. 2006). Why, then, have

company managements continued to invest in diversity

programs?

J. Cui � H. Na School of Business, Korea University, Seoul, Korea

e-mail: [email protected]

H. Na

e-mail: [email protected]

H. Jo (&) � M. G. Velasquez

Leavey School of Business, Santa Clara University,

500 El Camino Real, Santa Clara, CA 95053-0388, USA

e-mail: [email protected]

M. G. Velasquez

e-mail: [email protected]

1 This kind of diversity is generally called ‘‘demographic’’ diversity,

a term we define below.

123

J Bus Ethics (2015) 128:743–767

DOI 10.1007/s10551-013-1984-8

A substantial body of recent research in finance has

shown that religion influences managerial decision-making

(Hilary and Hui 2009; Dyreng et al. 2010; El Ghoul et al.

2012; McGuire et al. 2012a, b; Omer et al. 2013). This

nexus between religiosity and managerial decision-making

raises the possibility that corporate decisions in support of

diversity may be related to or influenced by the religious

commitments of a firm’s management. Because the extant

research has found that corporate decision-making is

influenced by religion, we believe that if we examine the

association between religiosity and diversity, we may gain

valuable insights regarding the possible influences under-

lying corporate decisions to invest in diversity initiatives.

Moreover, because the literature on corporate social

responsibility (CSR) takes diversity initiatives as part of a

company’s CSR policies (Velasquez 2012), understanding

the role religion plays in a company’s commitment to

diversity initiatives will also shed light on its role in the

company’s CSR stance.

While religiosity and diversity are both widely

researched constructs and numerous studies have exam-

ined the influence of each on the workplace (at both the

group and organization levels), the same cannot be said

about research on the association between the religiosity

of a firm’s managers and their workforce diversity poli-

cies. Gibson (2005), for example, found a rising trend in

the extent to which religious Americans want to have

their religion become an integral part of all areas of their

lives, including their work lives. Kutcher et al. (2010)

found that religiosity can affect employee attitudes and

behaviors including their organizational commitment, job

satisfaction, job stress, and burnout. Dezso and Ross

(2012) studied female representation in top management

teams and found that such gender diversity improves firm

performance but only when the firm’s strategy is focused

on innovation. O’Reilly et al. (1989) showed that age

diversity on teams reduced team cohesion and so reduced

team performance. Larkey (1996) found that racial

diversity reduced communication among a team’s mem-

bers and Tsui et al. (1992) found that it reduced the

commitment of majority members. While religiosity and

diversity have each been studied intensively, we have

found no studies that examine the relation between reli-

giosity and corporate decisions related to diversity; to the

best of our knowledge we are the first to examine this

relationship.

In this paper, we examine the association between cor-

porate decisions supporting firm-level workforce diversity

and the religiosity of the top managers that administer the

firm. To analyze this association, we investigate the reli-

giosity of the population of the geographical region in

which the firm’s headquarters is located and within which

its top management also resides, and inquire whether there

exists an association between this measure of religiosity2

and the firm’s diversity decisions, specifically regarding the

inclusion of women, minorities, and the disabled, in the

firm’s ranks.

To perform these tasks, we develop two relevant, but

competing explanations regarding the influence of religi-

osity on diversity. The first hypothesis we label the reli-

gious morality hypothesis. This hypothesis is based in part

on the moral teachings that the dominant American reli-

gions have proposed concerning diversity, and on the link

between religious morality and behavior (Geyer and Bau-

meister 2005; Vitell et al. 2009). The major U.S. religious

denominations (which are predominantly Protestant and

Catholic) have converged on the view that Christians have

a moral obligation to embrace diversity (Ellingsen 1993).

Since the research on religious moral beliefs shows that

such beliefs influence the behavior of church members, we

formulate the hypothesis that the degree of religiosity of a

firm’s managers will be positively related to their support

of diversity initiatives.

A second and competing explanation of the relation

between religion and diversity is one we call the resource-

constraint hypothesis. This second hypothesis, which is

based on agency theory (Jensen and Meckling 1976),

suggests that the manager’s sole aim should be to maxi-

mize shareholder value. That is, the manager has a fidu-

ciary obligation to choose only those projects that have a

positive net present value (NPV) and so maximize share-

holder value (Friedman 1970). In addition, because the

manager has a short-term outlook, the manager will reject

any projects that do not have a positive NPV over the short

term (Bolton et al. 2006). Since diversity programs gen-

erally do not have a positive NPV over the short term, the

manager will not choose to invest in diversity programs.

Thus, the resource-constraint hypothesis will predict a non-

positive association between a firm’s diversity policy and

the religiosity of its managers.

The remainder of the paper is organized as follows.

‘‘Literature review and hypotheses development’’ section

briefly describes the literature review and hypothesis

development. We then discuss the sample and measure-

ment of diversity and religiosity as well as our research

design in ‘‘Data, measurement, and research design section.

‘‘Discussion’’ section presents the empirical results. The

final sections summarize the limitation of this study fol-

lowed by our conclusions.

2 We define religiosity, following McDaniel and Burnett (1990), as a

belief in God accompanied by a commitment to follow principles

believed to be set by God. Also following McDaniel and Burnett we

measure religiosity in behavioral terms as frequency of church

attendance.

744 J. Cui et al.

123

Literature Review and Hypotheses Development

Diversity

Interest in workplace diversity has grown significantly not

only among practitioners, as we noted above, but also

among academic researchers. In his study of the growth of

interest in diversity among academics, Oswick (2011)

reports that the number of research articles on diversity

indexed by the Social Science Citation Index grew from

about 50 articles in 1990 to almost 500 by 2008.

Studies of diversity in the workplace fall into two broad

categories: ‘‘social’’ or ‘‘demographic’’ diversity and

‘‘functional’’ or ‘‘task-related’’ diversity (Christian et al.

2006; Simons and Rowland 2011). Although definitions of

diversity are themselves diverse, here we can adopt the

definition of Harrison and Klein (2007, p. 1200) who

provide a general definition of diversity as ‘‘the distribution

of differences among the members of a unit with respect to

a common attribute, X, such as tenure, ethnicity, consci-

entiousness, task attitude, or pay.’’ Studies of social or

demographic diversity look at diversity with respect to

attributes that are not directly related to the performance of

a task and that are relatively enduring (and, some would

add, that are observable) such as race, gender, ethnicity,

age, disability, and so on; studies of functional diversity

look at diversity with respect to attributes that are related to

the performance of a task such as knowledge, experience,

skills, conscientiousness, education, and so on. Here we

focus solely on demographic diversity and therefore set

aside the copious research literature on functional or task-

related diversity.

In practice, demographic diversity is considered to be a

kind of inclusivity that can go beyond the groups that are

legally protected in equal opportunity statutes. Firms may

choose from a spectrum of responses to implement their

commitment to diversity (Cole and Salimath 2012). At the

low end of the diversity spectrum, a firm may simply

comply with its minimal legal obligations as required by

civil rights legislation and rely on affirmative action and

equal employment opportunity initiatives to ensure it

embraces a suitable representation of genders, religions,

ages, and racial and ethnic minorities within its ranks. As

the firm’s goal shifts, however, from compliance to

awareness and acceptance of the potential value of a

diverse workforce, the firm may engage in diversity

training programs and attempt to exploit the variety of

perspectives and knowledge that diversity is said to provide

(Valentine and Page 2006). Eventually, firms that move to

the high-end of the spectrum of commitment to diversity go

beyond compliance or acceptance and begin to voluntarily

incorporate diversity as a key component in the firm’s

strategy and mission formulation (Cole and Salimath 2012).

For the purpose of this study, we will count an organization

as having a commitment to diversity so long as it undertakes

initiatives that are at least at the low end of this diversity

spectrum.

The histories of IBM and Coca-Cola Company are

illustrative of companies at various positions on this

spectrum of commitment to diversity. IBM, for example, is

a company positioned around the middle level of the

diversity spectrum. IBM has had a long-standing commit-

ment to equal opportunity and in 1953 it produced its first

Equal Opportunity Policy calling for equal opportunity in

hiring ‘‘Regardless of race, color, or creed’’ (IBM 2013).

Today all of its employee practices including hiring, pro-

motion, compensation, and the design and administration

of its benefit plans are conducted without regard to race,

color, religion, gender, gender identity or expression, sex-

ual orientation, national origin, genetic profile, disability,

or age (2010 IBM corporate responsibility report). This

thorough commitment to equal opportunity enabled IBM to

comply with all applicable civil rights laws and would have

positioned it as an exemplary company at the basic or low

end of the diversity spectrum. But in 1995 IBM established

eight ‘‘Executive Task Forces’’—Asian, Black, Hispanic,

Lesbian/Gay/Bisexual/Transgender, Men, native Ameri-

can, People with Disabilities, and Women—and charged

each with answering the question, ‘‘What is required for

your group to feel welcomed and valued at IBM?’’ Based

on the work of these task forces, IBM developed numerous

‘‘Diversity Network Groups’’ charged with mentoring and

coaching employees and adopted as one of its basic

‘‘Principles,’’ the imperative that ‘‘Each of us must take

responsibility to explore, understand and reflect differences

in culture, customs, time of day, holidays, language,

business requirements, the personal needs of stakeholders,

and the impact of our decisions on business dealings’’

(IBM 2013, p. 5). These initiatives moved the company to

the ‘‘next generation of diversity … beyond hiring prac-

tices and protection for our employee constituents’’ to a

new level of commitment to diversity, one aimed at cre-

ating ‘‘an innovative, integrated whole through inclusion,’’

and one where the company sees ‘‘the diversity of cultures,

people, thoughts and ideas as an imperative to successfully

delivering innovative, superior technologies to the mar-

ketplace’’ (IBM 2013, p. 3). The company had now posi-

tioned itself at a higher, middle level of the diversity

spectrum, the level at which a company moves beyond

compliance, recognizes the potential value of diversity, and

tries to use diversity to encourage innovation and an

understanding of its marketplace.

Coca-Cola Company took a different path on its diver-

sity journey. During the 1990s, the company publicly

asserted that it was committed to diversity and fairness in

all aspects of its business. But contrary to the company’s

Workforce Diversity and Religiosity 745

123

public statements, a lawsuit filed against the company by

its black employees in 1999 provided statistics indicating

that the median salary for black employees was one-third

less than that of white employees and that company poli-

cies kept blacks clustered at the bottom of the company and

unable to advance to senior management levels. Earlier, the

company’s few black executives had reported being

‘‘humiliated, ignored, overlooked, or unacknowledged’’

while other minority workers described an environment so

hostile that they fell victim to a variety of stress-related

illnesses (Winter 2000). If these accusations are true, then

Coca-Cola Company had perhaps not attained even a low-

end position on the diversity spectrum. In November 2000,

however, the Coca-Cola Company settled what had

become the largest racial-discrimination lawsuit in history.

In the wake of the $192.5 million settlement, the federal

court appointed a seven-member task force to oversee the

company’s diversity efforts. Coca-Cola’s then CEO Nev-

ille Isdell (2008) later explained how, with the task force’s

guidance, Coca-Cola worked to establish a new culture that

embraced diversity with measurable programs and initia-

tives designed to recruit, mentor, and retain minorities and

women. Coca-Cola experienced double-digit leaps in the

percentage of women and minorities holding management

and executive positions. Moreover, Isdell asserted, Coca-

Cola began to leverage the insights of its diverse workforce

to reap business benefits. The company not only launched

the kind of diversity education and training programs that

are characteristic of companies in the middle levels of the

diversity spectrum, it went on to make diversity part of its

global mission and its self-identity. Diversity, the company

states ‘‘is an integral part of who we are, how we operate

and how we see the future’’ (Coca-Cola JourneyTM).

Diversity became one of the company’s core values and a

strategic means of developing the ‘‘ability to understand,

embrace and operate in a multicultural world’’ (Coca-Cola

JourneyTM). In 2004, Luke Visconti, a co-founder of

Diversity Inc., which rates companies on their diversity

efforts, stated ‘‘…because of this settlement decree, Coca-

Cola was forced to put in place management practices that

have put the company in the top 10 for diversity’’ (Shin

2004). The company had thus been forced to jump from the

low end of the diversity spectrum, to the high end where

companies make diversity part of their strategy and mission

and see diversity as key to their success.

In fact, much of the research on demographic diversity

has focused on the ‘‘business case’’ in support of diversity,

which suggests that diversity generally improves perfor-

mance, both at the group and the organizational level. The

‘‘business case’’ for diversity is generally cited as the basic

reason why firms invest (and should invest) in initiatives

designed to increase the demographic diversity of the firm

(Cox 2001; Hansen 2003; Hubbard 2004; Page 2007;

Herring 2009). Studies of demographic diversity at the

organizational level, however, have not consistently sup-

ported the business case for diversity. Some studies, to be

sure, have concluded that demographic diversity is posi-

tively associated with improved performance at the orga-

nizational level, but others have found a negative

association, and others yet have found no association at all.

Herring (2009), for example, found that workplace diver-

sity is positively associated with larger revenues, larger

market share, and higher profits, while Armstrong et al.

(2010) found diversity was associated with increased labor

productivity, increased workforce innovation, and

decreased employee turnover. Carter et al. (2003) con-

cluded that increases in the proportion of women or racial

minorities on a firm’s board of directors are associated with

higher firm value. But Roberson and Park (2007) found that

‘‘firm performance declines with increases in the repre-

sentation of racial minorities in leadership up to a point,

beyond which further increases in diversity are associated

with increases in performance’’ (p. 548). Richard (2000)

found no general association between racial diversity and

firm performance, although at those firms that adopted a

growth strategy racial diversity improved employee pro-

ductivity, return on equity, and market performance while

at those firms that adopted a no-growth strategy racial

diversity was associated with lower employee productivity,

lower return on equity, and lower market performance.

Richard et al. (2003) likewise found that racial diversity

had no general effect on a firm’s financial performance (as

measured by return on equity), but at those firms that

adopted an innovation strategy racial diversity was asso-

ciated with higher financial performance while at those

firms that did not pursue an innovation strategy racial

diversity was associated with lower financial performance.

And Sacco and Schmitt (2005) found that an organization’s

racial diversity was negatively associated with its profit-

ability and positively associated with higher turnover rates.

Reviewing the conflicting findings in the literature, Kochan

et al. (2003) concluded that there is little evidence that

demographic diversity at the organizational level will

generally or consistently result in higher productivity or

better financial performance.

Studies of the relationship between demographic diver-

sity and performance at the group level have also been

inconclusive. Some have hypothesized that demographic

diversity will produce cognitive diversity, which in turn will

improve performance on cognitive tasks that involve crea-

tivity, decision-making, and problem solving (McLeod et al.

1996; Richard 2000; Page 2007); others have hypothesized,

however, that demographic diversity will produce conflict

and impede communication and that such effects will in turn

reduce group performance (Chatman 1991). While Murni-

ghan and Conlon (1991) found that demographic diversity

746 J. Cui et al.

123

lowered performance on cognitive tasks, Bantel and Jackson

(1989) found that it improved performance, and Watson

et al. (1993) found that it initially lowered and then subse-

quently improved performance. Some studies have shown

that demographically diverse groups outperform homoge-

neous groups (Cox et al. 1991), while the results of other

studies indicate that demographic diversity has a negative

effect on group processes (Konrad et al. 1992; Tsui et al.

1992). O’Reilly et al. (1989), Jackson et al. (1991) and

Wiersema and Bird (1993) found that age diversity

increased turnover, while Tsui et al. (1992) showed that as

gender diversity increased, white male turnover also

increased. Pelled et al. (1999) found that racial diversity

increased emotional conflict on teams, while age diversity

did not. Jehn et al. (1999) showed that age and gender

diversity increases relationship conflict in a group yet, par-

adoxically, it improves the morale of the group. In their

respective reviews of the research on diversity and perfor-

mance, Williams and O’Reilly (1998), Webber and Dona-

hue (2001) and Jackson et al. (2003) concluded that findings

on diversity at the group level were mixed and showed no

consistent effects on group performance.

Almost four decades of research, then, have failed to

provide conclusive evidence to confirm the claim that

demographic diversity generally improves performance, a

claim that is widely proposed as the reason why businesses

should and do invest in diversity initiatives. But if diversity

cannot be linked to any general improvement in perfor-

mance, why have businesses continued to invest in diver-

sity? In the next section, we turn to consider the possibility

that business investments in diversity are explainable, at

least in part, by religion, a non-economic factor that to this

point has been overlooked by the research on workplace

diversity.

Religiosity

Since Max Weber’s work on the Protestant Ethic (2009

[1904]) numerous studies have examined the question

whether religion influences human behavior (Iannaccone

1998; Stulz and Williamson 2003; Kumar et al. 2011).

Leege and Kellstedt (1993), Jelen (1998), and Fastnow

et al. (1999) have shown that religion has a strong influence

on political behaviors such as voting. Jeynes (2003) and

Barkan (2006) found that religion affects people’s attitudes

toward extramarital childbirth as well as decisions to

engage in or abstain from premarital intercourse. Grasmick

et al. (1991), Patee et al. (1994), and Stack and Kposowa

(2006) found that religiosity is inversely associated with

the likelihood that adult individuals will engage in tax

fraud. Agnew (1998) and Baier and Wright (2001) dem-

onstrated that religiosity is also inversely associated with

the likelihood that a person will engage in deviant

behaviors. Cochran and Akers (1989) found that religion is

likewise inversely related to juvenile delinquency.

Although some early studies questioned this inverse asso-

ciation (Hirschi and Stark 1969), more recent research has

reconfirmed it (Albrecht et al. 1977; Sloane and Potvin

1986; Donahue and Benson 1995; Chadwick et al. 2010).

Several studies have suggested that the presence of

religion also influences corporate decision-making (Nash

1994; Hilary and Hui 2009; Dyreng et al. 2010; El Ghoul

et al. 2012; McGuire et al. 2012a, b; Omer et al. 2013).

Nash (1994), for example, states that in her interviews of

‘‘evangelical CEOs,’’ those executives that evidenced a

commitment to religion indicated that their religious

commitment ‘‘guided’’ their decisions.

A number of researchers have argued that religion

influences behavior through the moral values that it imparts

to the religious person and the subsequent expression of

those values in the person’s behavior. Huffman (1988)

suggests, for example, that religiosity is a stronger deter-

minant of the individual’s values than any other predictor.

Similarly, Walker and Pitts (1998) suggest that a very

religious person will be one that embodies the traits of a

moral person, while Hunt and Vitell (1986, 1993) argue

that those who are more religious can be expected to be

more ethical in terms of their beliefs. McCabe and Trevino

(1993) suggested that the fear of God’s punishment, in

particular, will motivate the seriously religious individual

to adhere to ‘‘virtue and morality’’ and Shariff and Nor-

enzayan (2007) found evidence that confirmed their sug-

gestion. In addition, Weaver and Agle (2002) suggest that

since religiosity is known to have an influence both on

human attitudes and behavior, that influence may be

exerted by the religious self-identity that is formed by the

internalization of the beliefs and role expectations offered

by religion. Geyer and Baumeister (2005) assert that reli-

gious beliefs can supply those who hold such beliefs with

the ‘‘motivations, hope, and comfort that can allow them to

maintain virtuous behavior,’’ even when doing so may be

difficult. Rohrbaugh and Jessor (1975) claim that religios-

ity directly and positively influences self-control, which in

turn can facilitate moral behavior. In a similar vein, Welch

et al. (2006) claim that those individuals higher in religi-

osity tend to exhibit a higher level of self-control and are

less likely to engage in unethical behavior. Geyer and

Baumeister (2005) point out that ‘‘Religion has strong ties

to morality in that religions prescribe morality… Further,

many religious persons believe that religion is the source of

morality.’’ Consistent with these arguments, Kennedy and

Lawton (1998) found a negative relationship between

religiosity and a willingness to behave unethically.

If it is true that religion influences managerial decisions

and that this influence is exerted through the moral beliefs

that religion imparts to its adherents, then religious views

Workforce Diversity and Religiosity 747

123

about the moral obligations managers have should influ-

ence the decisions they make. In particular, the nexus

between religiosity and decision-making leads us to ask

whether religious views about a person’s moral obligations

influence managers’ decisions regarding workplace diver-

sity. To examine that topic we must look at what religion

teaches about the moral obligations people have with

respect to the issue of diversity.

Religiosity and Diversity

According to Gallup polls conducted during 2011, the

majority, 82.5 %, of all Americans say they are members of

a religion, 78 % identify themselves as Christians, and

4.5 % say they belong to a non-Christian religion, such as

Judaism (1.6 %), Islam (0.5 %) or other non-Christian

religion (2.4 %) (Newport 2011). These figures imply that a

surprising 95 % of those Americans who belong to a religion

self-identify as Christians. An earlier survey, the 2008

American Religious Identification Survey (ARIS), on which

the Bureau of the Census relies for its own estimates of U.S.

religious demographics, found that of those American adults

who self-identify as Christian, 33 % are Catholic, and the

other 67 % are members of Protestant3 denominations

including Baptist (20.8 %), Methodist (6.5 %), Lutheran

(5 %), Presbyterian (2.8 %), Mormon (1.8 %), Episcopal

(1.4 %), Church of Christ (1.2 %), Evangelical (1.2 %),

Jehovah’s Witness (1.2 %), Assemblies of God (0.6 %),

Seventh Day Adventist (0.6 %), United Church of Christ

(0.4 %), and ‘‘Unspecified’’ Christian (9.5 %) or ‘‘Unspec-

ified’’ Pentecostal (3.2 %) denominations (Kosmin and

Keysar 2009). These figures are substantially the same as

those found by the annual General Social Survey (Smith

et al. 2012) and the Portraits of American Life Study

(Emerson and Sikkink 2006). Thus, although the great

majority of religious Americans identify as being Christian,

the Christian denominations themselves are fairly diverse.

But while the Christian denominations differ in impor-

tant ways, they share a common set of moral beliefs about

diversity that are significant for our study (ILO 2012,

pp. 45–46). Two beliefs shared by all the Christian

denominations are, first, that all people share an equal

human dignity that all must respect and, second, that when

people come together they form communities in which

each has mutual obligations toward the others (Zinbarg

2001; Melé 2003, 2009, 2012a, b; Wilburn 2005). Melé

(2012b), for example, points out that within the Christian

view, particularly as expressed within Catholic social

teaching, a business is a community of persons in which

each possess a human dignity that all must respect. This

view implies, he argues, that workers have the right to

equal opportunity and that managers have a moral obliga-

tion to show equal respect to all members of the commu-

nity and to avoid unjust discrimination.

The view that Mele articulates is clearly present in the

‘‘social encyclicals’’ (pastoral letters on social issues

addressed to the entire Church) that Catholic popes began

to promulgate in the nineteenth century4 and have contin-

ued promulgating to the present time (Thompson 2010;

Finn 2012). The 1991 Encyclical, The Hundredth Anni-

versary, written by Pope John Paul II, for example, affirms

that ‘‘God imprinted his own image and likeness on man,

conferring upon him an incomparable dignity,’’ that

‘‘deserves respect’’ and that is the basis of ‘‘rights that no

one may violate,’’ particularly ‘‘by going against the

minority’’; moreover ‘‘a business… is a ‘society of per-

sons’ in which people participate in different ways and

with specific responsibilities’’ toward each other (John Paul

II 1991, sections 11, 13, 22, 43, and 44). In a statement

delivered in 1984 to the United Nations, John Paul II drew

out the implications of this view: Because of ‘‘man’s cre-

ation by God ‘in his own image’’’ he wrote, ‘‘every form of

discrimination based on race… is absolutely unaccept-

able.’’ (John Paul II 1984). Earlier, the Second Vatican

Council (a Church Council is a global meeting of bishops

who together constitute the Church’s highest teaching

authority) had similarly stated that since all people ‘‘are

created in God’s image… there is here a basic equality

between all men’’ and so ‘‘discrimination in basic personal

rights on the grounds of sex, race, color, social conditions,

language or religion, must be curbed and eradicated as

incompatible with God’s design’’ (Vatican Council II 1965,

section 29). These themes were reiterated in Brothers and

Sisters to Us, a 1979 pastoral letter of the American bish-

ops addressed to U.S. Catholics that condemned ‘‘every

form of discrimination… whether because of race, eth-

nicity, religion, gender, economic status, or national or

cultural origin’’ and affirmed ‘‘the value of fostering

greater diversity of racial and minority’’ groups within the

Church as well as in ‘‘the private sector.’’ Catholic social 3 The exact origin of the term Protestant is unsure, and may come

either from French protestant or German Protestant (Online etymol-

ogy dictionary 2012). However, it is certain that both languages

derived their word from the Latin: protestantem, meaning ‘‘one who

publicly declares/protests’’, which refers to the letter of protestation

by Lutheran princes against the decision of the Diet of Speyer in

1529, which reaffirmed the edict of the Diet of Worms in 1521,

banning Martin Luther’s 95 theses of protest against some beliefs and

practices of the early 16th century Catholic Church..

4 Popes were writing encyclicals long before the nineteenth century,

of course, but the first encyclical to explicitly address social issues

was the 1891 encyclical The Condition of Labor. Other sources of

Catholic Social Teachings besides the encyclicals include the

teachings of Church Councils such as the Second Vatican Council,

the addresses of the popes, and official publications and summaries

such as the Compendium of the Social Doctrine of the Church.

748 J. Cui et al.

123

teaching, then, sees the pursuit of diversity as a moral

responsibility of all Christians.

The teachings of the Protestant denominations con-

cerning diversity are not only similar to each other, but are

also quite similar to those found in Catholic social teaching

(ILO 2012; Peccoud 2004). As Zinbarg (2001, p. 122)

points out, the Protestant denominations likewise tend to

see ‘‘the workplace as a close-knit community’’ and affirm

that since every person was ‘‘created in the image of God’’

each has an equal ‘‘dignity’’ that all must respect. The

various Protestant denominations, however, do not recog-

nize any institution that, like the papacy, has the authority

to issue statements on social issues that denominational

members should accept. Nevertheless, the various Protes-

tant churches have issued statements on moral and social

issues that they recommend to their members, and a rep-

resentative picture of their teachings on diversity can be

drawn from these statements (Ellingsen 1993).

For example, the Evangelical Lutheran Church in

America (formed in 1988 by the unification of the Amer-

ican Lutheran Church, the Association of Evangelical

Lutheran churches, and the Lutheran Church in America)

during its 1993 Churchwide Assembly adopted a ‘‘Social

Statement’’ declaring that the Church had ‘‘committed’’

itself ‘‘to welcome cultural diversity’’ and took ‘‘delight’’

in the fact that people ‘‘have such diversity.’’ The statement

went on to declare that ‘‘racism… is sin, a violation of

God’s intention for humanity’’ and that ‘‘racial, ethnic, or

cultural barriers deny the truth that all people are God’s

creatures and, therefore, persons of dignity’’ (Evangelical

Lutheran Church in America 1993). The United Methodist

Church’s top legislative body, the General Conference—

the only entity that can speak for the United Methodist

Church—adopted in 1980, and readopted in 2000 and

2008, a resolution that asserted ‘‘all women and men are

made in God’s image and all persons are equally valuable

in the sight of God’’; moreover, the resolution adds, the

Church must aim at becoming an ‘‘inclusive’’ community,

i.e., one that embraces ‘‘racial and cultural diversity.’’ The

United Church of Christ (formed in 1957 from the unifi-

cation of the Evangelical and Reformed Church and the

Congregational Christian Churches) from the time of its

second General Synod in 1959, has advocated ‘‘the end of

racial segregation and discrimination in our communities—

in church life, in housing, in employment, in education, in

public accommodations and services’’ (Freeman 2001); at

its nineteenth General Synod in 1993 the United Church of

Christ committed itself to become a ‘‘multiracial and

multicultural church’’ that celebrates ‘‘its racial and ethnic

diversity.’’ The Presbyterian Church (U.S.A.), which was

established in 1983 through the merger of the Presbyterian

Church in the United States and the United Presbyterian

Church in the United States of America, expressed its

fundamental teachings in the Confession of 1967 which

declares that ‘‘God has created the peoples of the earth to

be one universal family’’ and He ‘‘overcomes the barriers

between sisters and brothers and breaks down every form

of discrimination based on racial or ethnic differences’’

(Presbyterian Church (USA) 1967, 9.44). Elaborating on

these themes in its 1999 policy statement ‘‘Facing Racism:

In Search of the Beloved Community,’’ the Presbyterian

Church (USA) pledged ‘‘to embrace racial and cultural

diversity’’ and celebrate ‘‘diversity and inclusiveness as

God’s purpose for the human family’’ (Presbyterian Church

(USA) 1999). The Southern Baptist Convention, the largest

Protestant denomination in the United States, in 1995,

adopted a ‘‘Resolution on Racial Reconciliation’’ confess-

ing that many ‘‘Southern Baptist forbears… participated in,

supported, or acquiesced in the particularly inhumane

nature of American slavery’’ and ‘‘in later years Southern

Baptists failed, in many cases, to support, and in some

cases opposed, legitimate initiatives to secure the civil

rights of African Americans’’, acknowledging that ‘‘every

human life is sacred, and is of equal and immeasurable

worth, made in Gods image, regardless of race or ethnic-

ity’’ the Baptist Convention asked forgiveness and resolved

to work to ‘‘eradicate racism in all its forms’’ (Southern

Baptist Convention 1995).

These and many other similar declarations show that in

spite of their differences, the teachings of the Protestant

denominations converge on an almost identical set of ideas

regarding diversity (Ellingsen 1993; Zinbarg 2001; Pec-

coud 2004; ILO 2012). First, they uniformly hold that since

all people were created in the image of God, all men, and

women of any race or color are equal. Second, they affirm

that discriminating on the basis of race, ethnicity, or gender

is wrong and that Christians should support a diversity that

embraces women and all ethnic and racial minorities. And

third, they indicate that all must work to change the

organizations and social structures that continue to embody

discrimination. Thus, a remarkable homogeneity exists

among the Christian churches of the U.S. with respect to

their teachings on diversity.

However, one aspect of diversity on which the U.S.

Christian denominations have not agreed is the extent to

which diversity initiatives should be extended to include

homosexual men and women. While some denominations

such as the United Church of Christ have issued certain

statements supporting equal rights for gay and lesbian

persons, others such as the Roman Catholic Church, the

Southern Baptist Convention, the Lutheran church-Mis-

souri Synod, and the United Methodist Church condemn all

same-sex sexual activity as sinful, and others, such as the

Anglican church and the United Church of Christ still

remain split on the matter. While the Christian denomi-

nations in the U.S. have all embraced a diversity that is

Workforce Diversity and Religiosity 749

123

inclusive of differences of gender, race, and ethnicity, they

have disagreed on whether diversity initiatives should

include gays and lesbians.

The idea that the Christian denominations in the U.S.

have embraced a commitment to diversity seems, however,

to be contradicted by several studies that have found a

positive link between religiosity and racial prejudice, par-

ticularly among white Christians. Batson et al. (1993), for

example, examined 47 different studies published between

1940 and 1990 and found that 37 of them showed a positive

relation between religiosity and prejudice. However, this

apparent link between being religious and being racially

prejudiced has been found to be moderated by whether a

person’s religious commitment is ‘‘extrinsic’’ or ‘‘intrin-

sic’’—two constructs originally developed by Gordon W.

Allport (Hunt and King 1971). Allport and Ross (1967)

characterized a person’s religiosity as ‘‘extrinsic’’ when the

person ‘‘uses his religion’’ as a means toward other ends

such as social gains, and they characterized a person’s

religiosity as ‘‘intrinsic’’ when the person is ‘‘motivated’’ to

embrace religion for itself. Starting with the study of All-

port and Ross (1967), Batson et al. (1993) examined 32

studies of the relation between religiosity and prejudice

that took the extrinsic and intrinsic constructs into account,

and reported that all but two of them found that those

whose religiosity was extrinsic were relatively highly

prejudiced, while those whose religiosity was intrinsic

were relatively low in prejudice. Twenty-three of the

studies they examined measured intrinsic versus extrinsic

by whether a person was involved in religious activities,

such as church attendance, to a high or low degree, sug-

gesting that the greater a person’s participation in religious

activities such as church attendance, the less likely it is that

the person will be racially prejudiced. Finally, Batson et al.

(1993) reviewed six additional studies that looked at

whether an intrinsically religious person’s lack of prejudice

against a specific group was related to whether that per-

son’s religion proscribed prejudice against that group, and

they concluded that these studies showed that ‘‘to the

degree that people value their religion intrinsically they are

more likely to report being tolerant of those their religious

community tells them they should tolerate’’ (1993, p. 323).

The research on religiosity and prejudice, then, suggests

that intrinsic religiosity as exhibited by a higher level of

participation in religious activities such as church atten-

dance, is associated with a lack of prejudice. And, in par-

ticular, it is associated with a lack of prejudice against those

specific groups that religion teaches one should not be

prejudiced against. The research on religiosity and pre-

judice, then, is consistent with the claim that the teachings of

the Christian denominations proscribing prejudice and dis-

crimination against women or racial and ethnic minorities,

are likely to influence the behavior of the members of those

denominations depending on their level of participation in

church activities such as church attendance.5

It may be helpful to briefly summarize the discussion

thus far. We have seen that the research on religiosity has

shown that religiosity influences the attitudes and behav-

iors of its adherents. In particular, religious moral beliefs

influence the attitudes and behaviors of those who adhere

to those religious beliefs. We then saw that the dominant

U.S. religions uniformly teach that people have a moral

obligation to support diversity. This suggests that the

religiosity of individuals—including the top managers of

business firms—should lead them to support diversity, and

the greater their religiosity, the greater their support of

diversity. How are we to measure the religiosity of the top

managers of a firm? Previous studies have measured the

religiosity of managers by using (as a proxy) the religiosity

of the area in which they reside (Hilary and Hui 2009;

Dyreng et al. 2010; Grullon et al. 2010; El Ghoul et al.

2012). As we explain more fully below, we will use this

method of estimating the religiosity of a firm’s top man-

agers. If we assume that the top managers of a firm reside

in the area in which the firm’s headquarters is located, our

discussion leads us to suggest that if a firm is headquartered

in an area of higher religiosity, its top managers will

exhibit a higher level of religiosity and so greater support

for diversity; if the firm is headquartered in an area of

lower religiosity, its top managers will exhibit lower levels

of religiosity and so lower support for diversity.

There is a second set of considerations that also suggests

that the religiosity of an area should lead the top managers of

a firm to support diversity initiatives. In addition to the

psychological studies that have examined the influence that

a person’s own religious beliefs have on his or her behavior,

a series of sociological studies on ‘‘moral communities’’

have found that the religiosity of a surrounding community

‘‘is a potent generator of conformity’’ for members of that

community (Welch et al. 1991, p. 159; see also Cochran and

Akers 1989; Sloane and Potvin 1986; Stark 1996). These

studies imply that communities with a high level of religi-

osity promote conformity to their religious morality and

their morality thereby exerts a significant influence on the

behavior of members of that community (Stark et al. 1980,

5 Another issue that may seem to clash with the idea that the Christian

denominations in the U.S. are supportive of diversity is the fact that

most U.S. congregations today are racially segregated. However,

although congregations remain segregated, during the last two decades

they have made substantial efforts to integrate themselves, particularly

through the ‘‘reconciliation’’ movements the churches launched during

the 1990s. The reasons why they remain segregated in spite of the

efforts both white and black congregations have made to integrate their

memberships are not completely clear. However, we note here that our

claim is that the Christian denominations have supported diversity in

business organizations, even if they have failed to make their own

organizations more diverse.

750 J. Cui et al.

123

1982; Pescosolido 1990; Regnerus 2003). These studies

have tended to operationalize the construct of a ‘‘commu-

nity’’ in terms of a geographical region, and several have

measured a region’s religiosity in terms of the proportion of

religious adherents residing in that region (for example,

Stack and Kposowa 2006). Some of these studies have

shown that the religiosity of the population of a city, for

example, influences the attitudes or behaviors of the resi-

dents of that city (Stark et al. 1980, 1982; Ellison et al.

1997); some have shown that the religiosity of the popula-

tion of a county influences the attitudes or behaviors of that

county’s residents (Pescosolido 1990; Regnerus 2003); and

some have shown that the religiosity of the population of a

nation influences the attitudes or behaviors of its citizens

(Stack and Kposowa 2006). A person’s religious context is

significant, then, because his or her behaviors and attitudes

will be influenced by the religiosity of the people of the

region within which he or she resides (Greeley et al. 1981;

Wald et al. 1988; Leege and Welch 1989; Ellison et al.

1997). As we have already seen, the dominant U.S. religions

teach that people have a moral responsibility to support

diversity. Consequently, if we assume, again, that the top

managers of a firm reside in the area (e.g., the county) in

which the firm is headquartered, then the research on moral

communities suggests that the greater the religiosity of the

population of that area, the greater the pressures on man-

agers to support the diversity that U.S. religions uniformly

prescribe.

Accordingly, we hypothesize that since the dominant

religions in the United States uniformly embrace the view

that all people have a moral responsibility to support

diversity, and since religious morality influences the

behaviors of people, both directly and through the com-

munity’s pressures to conform, the managers of firms

headquartered in areas with higher religiosity will tend to

evidence higher levels of commitment to diversity initia-

tives. We call this the ‘‘religious motivation hypothesis’’:

Hypothesis 1 Under the religious motivation hypothesis,

the top managers of firms headquartered in areas with

higher religiosity tend to support more diversity initiatives.

There is a competing and mutually exclusive explana-

tion of the relation between religion and workplace diver-

sity, namely the resource-constraint hypothesis, which is

based on agency theory. Coase (1937), Ross (1973), and

Jensen and Meckling (1976) developed agency theory

which views the firm as a nexus of contracts and the

manager as an agent contractually delegated by share-

holders-principals to operate the firm in the best interests of

shareholders by maximizing firm value and stock price.

Most traditional economists and finance scholars have

adopted the view of the firm as a nexus of contracts and the

manager as an agent of shareholders dedicated to

maximizing shareholder wealth. Indeed, the agency theory

view of the firm was originally developed for financial

purposes. The work of Jensen and Meckling (1976), for

example, was aimed at analyzing the major types of con-

flicts of interest between shareholders and management.

Managers and shareholders may differ, of course, in

their evaluation of risk. In addition, managers may have a

shorter time horizon (short-termism) (Cheng and Warfield

2005; Bolton et al. 2006) than shareholders and in their

pursuit of promotion may aim at early returns and fast

rewards even at the cost of shareholders’ long-term inter-

ests. Furthermore, although the objective of the firm is to

maximize shareholders’ wealth under the standard share-

holder wealth maximization (SWM) model, managers may

use corporate resources to provide themselves with various

management perquisites, i.e., superfluous executive jets,

luxurious offices, first-class air travel, etc. Few scholars,

however, believe that CEO perquisites represent an effi-

cient way to monitor or influence executives. Recent

studies show that the relation between management perks

and short-run abnormal return is negative (Rajan and Wulf

2006; Yermack 2006; Grinstein et al. 2011). Grinstein et al.

(2011), in particular, find that perks are positively related to

CEO power and free cash flow, while negatively associated

with a firm’s growth opportunities.

Obviously, there is a separation between ownership and

control, and there is no reason to believe that if left on their

own managers will necessarily act in the best interest of the

shareholders. Consequently, shareholders will monitor

managerial decisions to make sure that management makes

every decision in a way that maximizes firm value and will

put in place incentives that align managerial interests with

those of shareholders. As managers are supposed to act for

the best interests of shareholders, and they have a short-

termism, they choose only positive NPV projects that

maximize firm value and stock price over the short term,

and often could not give enough attention to moral or

religious concerns even if they wanted to. Because the

firms’ financial resources are limited and any returns from

implementing diversity programs usually have a longer

time horizon, managers will not engage in diversity pro-

grams (Kacperczyk 2009).

Furthermore, even when a diversity program has quick

returns, it will find itself competing with many other sub-

stitute projects that have similarly quick returns. Even

religiously motivated projects could become competing

substitutes for a diversity program in a highly religious

community that might be willing to provide the firm with

greater rewards for investing in a religious project. To the

extent that several positive NPV projects, one or more

religious projects, and perhaps several other CSR projects

are all substitutes for a diversity program, they will be

competing against each other for limited resources and it is

Workforce Diversity and Religiosity 751

123

likely that the diversity program will only rarely win the

contest. Thus, the resource-constraint hypothesis based on

agency theory will predict the following;

Hypothesis 2 Under the resource-constraint hypothesis,

the top managers of firms headquartered in areas with

higher religiosity, do not tend to engage in more diversity

initiatives.

Hypothesis 2 is also is in line with the view of some

researchers, such as Kohlberg (1981), who claim that

religiosity and morality are not related. Moreover,

hypothesis 2 is also related to the view of CSR that was

classically expressed by Milton Friedman (1970). Fried-

man advanced the view that the manager has a moral

obligation to ‘‘maximize profits’’ for shareholders and

advocated the adoption of incentives that would ensure that

managers pursue this objective.

But which of our mutually exclusive hypotheses is

correct? Because it is an empirical question whether

hypothesis 1 or hypothesis 2 has greater validity, we turn

next to examine the impact that religiosity has on corporate

decisions regarding workforce diversity by using empirical

data. We do this in the following sections.

Data, Measurement, and Research Design

Data and Measurements of Workforce Diversity

In order to test our hypotheses, we need to know the extent

to which the managers of firms engage in diversity initia-

tives. To the best of our knowledge, there is no database

that provides that kind of information about specific man-

agers. However, the Kinder, Lydenberg, and Domini Stats

(KLD) database provides information about the firm-level

diversity initiatives of several thousand companies. We

assume that these corporate initiatives are the outcomes of

decisions made by the firm’s top management, and so

interpret the KLD data on a firm’s diversity initiatives as

data about the diversity decisions made by each company’s

top managers. In this study, therefore, we use the data on

diversity for a sample of firms in the KLD database taken

from the period 1991 to 2010 to measure the extent to

which the managers of those firms engage in diversity

initiatives.

KLD’s database is intended for the use of investors who

want to know the CSR record of the companies in which

they invest. KLD rates each of the companies in its data-

base in seven major ‘‘corporate social responsibility’’ cat-

egories including community relations, corporate

governance, diversity initiatives, employee relations,

environment, human rights, and products. In each of these

CSR categories each company is given positive evaluations

for each of several possible ‘‘strengths’’ it possess in that

category, and a negative evaluation for each of several

possible ‘‘concerns’’ that the company’s activities raise

within that category. Altogether (i.e., counting all seven

social responsibility categories), the KLD rating criteria

provide approximately 80 ‘‘strengths’’ and ‘‘concerns’’

ratings for each company in their database. Prior to 2001,

KLD covered approximately 650 firms listed on the S&P

500 or Domini 400 Social Indexes and issued its reports in

August of each year. However, starting in 2001 and 2002,

the KLD ratings were assigned to approximately 1,100

(3,100) firms listed on the S&P 500, the Domini 400 Social

Indexes, and the Russell 1,000 (Russell 2,000) Indexes and

their reports were issued as of December 31st of each

year.6

As with the other items in the KLD database, the

diversity items are each evaluated by being assigned a

binary (0 and 1) value for each strength and each concern.

Since the number of measures varies across the years, we

use an index to aggregate the individual activities. In

Appendix, we show how KLD gives diversity ratings in

eight specific criteria for strengths and three for concerns.

The KLD diversity ratings are based on the firm’s inclusion

of women and minorities in top management, directorships,

and promotions, its adoption of policies regarding gay and

lesbian employees and disabled employees, and other

diversity strengths, as well as on certain diversity concerns,

such as having been forced to pay substantial fines or civil

penalties as a result of affirmative action controversies,

having no women on its board of directors or in its top

management, and being involved in any other significant

diversity controversies. In this study, however, we set aside

and do not use the KLD diversity rating concerning Gay

and Lesbian Policies. We set this item aside because, as we

noted earlier, the Christian denominations in the United

States do not have a unified teaching on gay and lesbian

issues.

We constructed a diversity index (DIV_IDX) following

the CSR index-making procedure of Jo and Harjoto (2011,

2012). For each category, we let Dijt denote an indicator

variable of diversity for firm i with strength j for year t, Dikt

denotes an indicator variable of diversity for firm i with

concern k for year t, and Djt and Dkt each denote the

maximum number of KLD diversity strengths and con-

cerns, respectively, in year t for any firm. The index Dit of

each diversity category for firm-year observation it is

6 Because KLD increased its sample size substantially by including

the Russell 1000 in 2001 and the Russell 2000 in 2003, the results for

the diversity measures in 2001 and 2003 may not be stable due to the

large increase in the number of firms in the sample. As a robustness

check, we have also excluded 2001 and 2003 from the sample.

Overall, our untabulated results are robust to the exclusion of 2001

and 2003.

752 J. Cui et al.

123

Dit ¼ P

j D ijt �

P k D

ikt þ Dkt

Djt þ Dkt

In short, our diversity index score (DIV_IDX) is the

ratio of the difference between the KLD diversity strengths

minus the KLD diversity concern items plus the maximum

number of KLD strengths (numerator) divided by the sum

of the maximum number of KLD strengths and concerns

(denominator). The reason why we add the maximum

number of KLD strengths in the numerator is to avoid

ending with a possible negative diversity scores. In

addition, we use the net scores of diversity (DIV_NET)

calculated as the net scores of diversity strengths minus the

diversity concern items, as an additional and independent

diversity measure to later examine the robustness of our

analysis.

Measurement of Religiosity

Testing our hypotheses also requires that we know the

religiosity of the areas in which the headquarters of the

firms in the KLD database are located. To the best of our

knowledge, there is no database that provides such infor-

mation about the headquarters of the firms in the KLD

database. However, the American Religion Data Archive

(ARDA) provides data about the religiosity of the popu-

lations of each of the counties in the United States (as

measured by the number of people who participate in

church activities), and the COMPUSTAT database pro-

vides the location of each firm in the KLD database (as

well as other financial variables for each firm). By putting

these two databases together, we can determine the reli-

giosity of the county in which each firm’s headquarters is

located. Moreover, assuming that the top management of a

firm resides in the same county in which its headquarters is

located, this will also tell us the religiosity of the area in

which each firm’s top managers reside.

We therefore construct our religiosity variable by using

the ARDA dataset, as has been done by Hilary and Hui

(2009), Dyreng et al. (2010), Grullon et al. (2010), and El

Ghoul et al. (2012). The ARDA provides the ‘‘U.S. church

membership data file at county level,’’ from which we get

the information on the number of members and adherents

for each religious group. In this paper, as a measure of the

degree of religiosity (REL) of the residents of each county,

we use the percentage of adherents, which we derive by

dividing the number of all adherents in a county by the

total population of the county. The ARDA provides the

adherent data on a 10-year basis (1971, 1980, 1990, and

2000). Since the KLD and other data are on an annual

basis, following Hilary and Hui (2009), Dyreng et al.

(2010), Grullon et al. (2010), and El Ghoul et al. (2012), we

linearly interpolate and extrapolate the religiosity variable

to obtain values in the missing years from 1991 to 2010 and

use these to match with our diversity index and with any

other independent variables we use.7

Construction of the Final Sample

Our final sample is constructed by merging the diversity

index we constructed from the KLD data, the location, and

financial variables from COMPUSTAT and CRSP, and the

religiosity index we constructed from the ARDA data. We

first match the KLD-based diversity dataset and the loca-

tion and financial variables from COMPUSTAT and CRSP,

since they all contain firm-level variables. Then, this con-

structed sample is combined with the religiosity index.

Since the latter are provided on a county-level basis, we

match the datasets by using the counties where the firms’

headquarters are located. However, since the COMPU-

STAT dataset for the most part does not provide the names

of the counties where the firms’ headquarters are located,

we utilize their ZIP codes instead. But while the ZIP codes

of the firms are provided in the COMPUSTAT database,

the ARDA only provide county codes, i.e., FIPS. We

therefore match the FIPS codes with the ZIP codes, which

enables us to obtain our final sample set.

After matching across all these databases and account-

ing for lags and changes in diversity (DIVERSITY), reli-

giosity (REL), and our other control variables, the size of

the combined sample measures approximately 26,555 firm-

year observations from 1991 to 2010. Actual samples used

in the regression analyses differ slightly from the combined

sample since the availability of the data for the variables

varies across different regression models.

Research Design

Since we seek to investigate the relation between firm-level

diversity initiatives (DIVERSITY) and area religiosity

(REL), we first regress the diversity indices, constructed

from the KLD data, on the level of religiosity (REL), as

measured by the percentage of adherents, along with our

other control variables. Our choice of control variables

generally include the variables used in the CSR study of Jo

and Harjoto (2011, 2012) because diversity is one of the

important sub-categories of CSR. According to prior lit-

erature on CSR, a firm’s CSR choices may be linked to

factors such as its financial performance, investment

growth opportunities, risk, size, R&D, and advertising.

7 To check the existence of potential interpolation bias, we conduct

our regressions using only the years for which we have direct survey

data on religiosity (1990 and 2000) in our unreported results. Though

the sample size is much smaller, the significant association between

diversity and religiosity measure suggests that our linear interpolation

does not create systematic noise in our main results.

Workforce Diversity and Religiosity 753

123

Accordingly we assume that these factors could affect a

firm’s decisions about diversity issues as well. Thus, we

include various financial characteristics of the firms

including the firm’s size, as measured by the log of its total

asset value (LOGTA) or the total market value of its equity

(LOGMVE), and the firm’s investment growth opportuni-

ties as measured by Tobin’s Q. We also control for the

firm’s total debt ratio (DEBTR), advertising expense ratio

(ADVR), R&D expenditure ratio (RNDR), capital expen-

diture ratio (CAPEXA), one-year sales growth rate (SA-

LEG), operating income (ROA), and the Fama–French

(1997) 48 industry dummy variables. Based on suggestions

in the finance and accounting literature, we also control for

firm risk, as measured by the volatility (standard deviation)

of its monthly stock returns (DEVRET). To handle the

time-invariant, firm-fixed effects in the relation between

our diversity and religiosity measures, we run fixed effects

regressions.

DIVERSITYi;t ¼ a0 þ a1RELi;t

þ Xn

j¼2

ajCONTROLVARIABLESi;t þ ui

þ ei;t

As we suggested earlier, our measure of religiosity could

influence our measure of diversity. The diversity scores in

the KLD database, however, tend to be autocorrelated. In

addition, the religiosity variable is endogenously

determined. Thus, in order to address the endogeneity and

autocorrelation issues, we adopt a well-developed dynamic

panel generalized method of moment (GMM) estimator

following Wintoki et al. (2012), and use the method for the

determinants of diversity, and then compare the results to

those obtained from the fixed-effects regressions.

DIVERSITYi;t ¼ a0 þ a1RELi;t

þ Xn

j¼2

ajCONTROLVARIABLESi;t

þ j1DIVERSITYit�1

þ j2DIVERSITYit�2 þ gi þ ei;t

We repeat the same regression procedures by replacing the

diversity index scores (DIV_IDX) with diversity net scores

(DIV_NET) as well. Table 1 lists the definitions and con-

struction of all the variables that we use in this study.

Empirical Results

Descriptive Statistics

In Table 2, we present the summary statistics of themain and

control variables. In Panel A, we present the descriptive

statistics of religiosity and demographic variables. The

average number of REL is 51.81 % indicating that the

average number of the percentage of adherents (= total

adherents/total population) per county is approximately

51 %. In addition, we present descriptive statistics regarding

the workforce diversity scores (DIV_IDX and DIV_NET)

and firm characteristics. The mean of DIV_IDX is 0.3045

and the mean of DIV_NET is 0.0232. The average volatility

of monthly stock returns (DEVRET) during a year is 0.1002.

The averages of the firms’ financial characteristics reported

in Table 2 are comparable with samples in previous studies,

such as Ioannou and Serafeim (2010), Baron et al. (2011),

Dhaliwal et al. (2011), and Jo and Harjoto (2011, 2012).

In Panel B, we present the mean values of the religiosity

(REL) and workforce diversity scores (DIV_IDX and

DIV_NET) on a state by state basis. The REL value is

highest in District of Columbia, 0.758, and lowest in

Oregon, 0.328. The high REL value in Utah is presumably

Table 1 Variable descriptions and data source

Variables Definitions

DIV_IDX The combined diversity score index of strengths and

concerns of each diversity items (source: KLD)

DIV_NET The net score of diversity strengths minus diversity

concern items (source: KLD)

REL The degree of local religiosity measured by the

percentage of adherents (= total adherents/total

population) per county, linearly interpolated and

extrapolated, based on the 1990 and 2000 data

(source: American Religion Data Archive

(ARDA))

Firm control variables

LOGTA Log of total asset (source: Compustat)

LOGMVE Log of market value of equity (source: Compustat)

MBVE Growth opportunities measured by market value of

equity divided by book value of equity (source:

Compustat)

CAPEXA Capital expenditure expense divided by total sales

(source: Compustat)

SALEG Sales growth rate from t-1 to t (in %) (source:

Compustat)

DEVRET Standard deviation of monthly stock returns for the

past year prior to current year (source: Center for

Research in Stock Prices (CRSP))

DEBTR Long-term debt divided by total asset (source:

Compustat)

ADVR Advertising expense divided by total sales (source:

Compustat)

RNDR R&D expense divided by total sales (source:

Compustat)

FF48

INDUSTRY

Fama and French (1997) 48 industry classification

(source: Compustat)

This table presents definitions of the variables used in the empirical

tests

754 J. Cui et al.

123

Table 2 Descriptive statistics

Panel A. Workforce diversity scores (diversity index and net score) and firm characteristics

Variable Observation Mean Std Dev Min Median Max

DIV_IDX 27,600 0.3045 0.1120 0.0000 0.3000 1.0000

DIV_NET 27,600 0.0232 1.1174 -3.0000 0.0000 6.0000

REL 27,600 0.5181 0.1314 0.0000 0.5181 1.0000

LOGTA 27,600 7.4533 1.7343 3.8980 7.3672 12.0647

LOGMVE 27,500 7.2940 1.5563 4.0556 7.1577 11.4776

MBVE 27,500 3.1969 3.1997 0.4451 2.2110 21.4117

CAPEXA 26,700 0.0468 0.0531 0.0000 0.0315 0.2988

ADVR 27,600 0.0106 0.0283 0.0000 0.0000 0.1775

RNDR 27,600 0.0307 0.0639 0.0000 0.0000 0.3702

DEBTR 27,500 0.1772 0.1717 0.0000 0.1378 0.6868

SALEG 27,400 0.1281 0.2965 -0.5154 0.0797 1.6919

DEVRET 26,900 0.1002 0.0526 0.0326 0.0861 0.2919

Panel B. Workforce diversity (diversity index and net score) and religiosity: State-by-state comparison

DIV_IDX DIV_NET REL

AK 0.276 -0.250 0.398

AL 0.282 -0.196 0.506

AR 0.283 -0.194 0.569

AZ 0.306 0.035 0.386

CA 0.311 0.084 0.465

CO 0.283 -0.189 0.453

CT 0.343 0.405 0.637

DC 0.352 0.512 0.758

DE 0.362 0.607 0.433

FL 0.291 -0.117 0.430

GA 0.293 -0.095 0.505

HI 0.360 0.563 0.357

IA 0.323 0.204 0.521

ID 0.287 -0.143 0.421

IL 0.328 0.256 0.561

IN 0.298 -0.047 0.450

KS 0.271 -0.315 0.467

KY 0.307 0.049 0.494

LA 0.280 -0.224 0.529

MA 0.293 -0.090 0.706

MD 0.307 0.042 0.469

ME 0.349 0.463 0.386

MI 0.326 0.238 0.420

MN 0.330 0.279 0.592

MO 0.284 -0.182 0.496

MS 0.273 -0.289 0.492

MT 0.248 -0.529 0.400

NC 0.300 -0.023 0.409

ND 0.307 0.045 0.651

NE 0.311 0.088 0.514

NH 0.313 0.107 0.591

NJ 0.317 0.147 0.578

Workforce Diversity and Religiosity 755

123

due to its large Mormon population. In the untabulated

results, we got by examining and comparing 529 counties,

we find that the highest REL value is that of Bristol County

in Virginia, 0.8912, and the lowest is that of Hancock

county in Maine, 0.1645. The DIV_IDX is highest in

Delaware, 0.362 and lowest in Wyoming, 0.174. Our

unreported results suggest that the highest DIV_IDX is

found in Yellowstone county in Montana, 0.7500, and the

lowest score is for Davidson county in North Carolina,

0.1673. The DIV_NET is highest in Delaware, 0.607 and

lowest in Wyoming, -1.333. Moreover, we find the highest

average DIV_NET in Buffalo county in New York, 1.0000

and in a few other counties while the lowest DIV_NET

score of -1.346 is that of Winona county in Minnesota.

These descriptive statistic numbers suggest that there are

quite wide variations in the religiosity and diversity scores

across counties as well as states.

Table 3 presents the Spearman correlation matrix for the

variables discussed in the previous section after we

removed one percent outliers. Consistent with the expected

positive association between the measure of a firm’s

diversity initiatives and the measure of the religiosity

(REL) of the county in which the firm’s headquarters is

located, DIV_IDX is positively related to REL. As antici-

pated, DIV_NET is highly correlated to DIV_IDX with a

correlation coefficient of 0.997. The Spearman correlation

coefficient between DIV_IDX and REL measures 0.045,

which is statistically significant, at least, at 5 %. We con-

sider the correlation between religiosity and diversity, at

about 4.5 %, to be small, but non-trivial. The Spearman

correlation coefficient between REL and DEVRET is jus-

tifiable as well, scoring -0.1829 and also significant. Most

of the variables are found to be significantly correlated with

DIV_IDX and DIV_NET, at least, at the 5 % level.

While most of the variables are found to be significantly

correlated with DIV_IDX and DIV_NET in bivariate

associations, we turn our attention on multivariate relations

in the next section.

Multivariate Regression Results

Because we use cross-sectional and time-series combined

panel data, we need to employ fixed effects regressions to

account for fixed effects within each firm in the sample and

to impose time independent effects for each variable that

could be correlated with the regressors. We start our

Table 2 continued

Panel B. Workforce diversity (diversity index and net score) and religiosity: State-by-state comparison

DIV_IDX DIV_NET REL

NM 0.318 0.174 0.542

NV 0.290 -0.127 0.355

NY 0.322 0.200 0.657

OH 0.304 0.017 0.451

OK 0.263 -0.385 0.576

OR 0.321 0.186 0.328

PA 0.295 -0.066 0.596

RI 0.319 0.174 0.595

SC 0.263 -0.383 0.480

SD 0.275 -0.265 0.603

TN 0.285 -0.175 0.460

TX 0.275 -0.273 0.498

UT 0.284 -0.182 0.705

VA 0.290 -0.122 0.370

VT 0.349 0.471 0.407

WA 0.318 0.161 0.351

WI 0.308 0.051 0.530

WV 0.286 -0.178 0.429

WY 0.174 -1.333 0.369

Total 0.305 0.023 0.520

Panel A display descriptive statistics from 1991 to 2010, with varying firm-year observations. Sample size varies due to data availability. Mean,

median, minimum, and maximum are reported. The definitions of variables are provided in Table 1. We measure the degree of religiosity by the

percentage of adherents (= total adherents/total population) per county (REL). In Panel B, we compare each state’s mean values of diversity

index (DIV_IDX), diversity net score (DIV_NET) and religiosity (REL)

756 J. Cui et al.

123

analysis with a fixed effects method based upon the

assumption that the unobservable individual effects known

to be correlated with regressors are non-random.

Table 4 presents the results from the baseline fixed

effect regression of the level of DIV_IDX and DIV_NET

on the level of REL with controls. We find that the impact

of REL on DIV_IDX and DIV_NET is positive and sta-

tistically significant at the one (five) percent level with

t-statistics ranging from 1.99 to 3.01. The positive associ-

ation between REL and the diversity measures remains

intact when we control for firm size either by the log of

total assets or by the market value of its equity, and both

when we include and exclude firm growth opportunities as

measured by the lag of market-to-book value of equity

(LAG(MBVE)). This significantly positive association

between diversity and religiosity is generally consistent

with the religious motivation hypothesis (our Hypothesis

1), but not with the resource-constraint hypothesis (our

Hypothesis 2). We also find that bigger firms and firms

with high debt invest more in diversity policies, while firms

with high capital expenditures (CAPEXA) tended not to

invest in diversity practices.

Next, we ask whether firms in highly religious com-

munities are more interested in the positive dimensions of

diversity issues, such as the inclusion of women and

minorities in top management and directorships, policies

for disabled employees, and other strengths (DIVER-

SITY_STRENGTH), or are instead interested in resolving

their controversy concerns, such as having no women on

the board or paying high penalties due to controversies

related to diversity (DIVERSITY_CONCERN) (see

Appendix for more detail). Table 5 reports the results from

the fixed-effects regressions for diversity strengths in Panel

A and diversity concerns in Panel B. As in our baseline

fixed effect regressions, we find a significant and positive

relation between DIVERSITY_STRENGTH and REL.

Both the coefficients on DIVERSITY_STRENGTH and

corresponding t-statistics shown in Panel A are similar to

the baseline fixed effects regressions. Again, the fixed

effects regressions results are also consistent with the

religious motivation explanation. The coefficients on

DIVERSITY_CONCERNS shown in Panel B, however,

are all non-significant. Thus, the impact of religiosity on

DIVERSITY_STRENGTH and DIVERSITY_CONCERN

is not symmetric; that is, the positive association between

diversity and REL is mostly due to diversity strengths. This

suggests that managers of firms headquartered in areas with

higher religiosity are more interested in improving those

company practices that add to workforce diversity than in

rectifying those company practices that may have harmed

diversity.

Previous studies on CSR (Ioannou and Serafeim 2010;

Jo and Harjoto 2011, 2012) suggest that a firm’s CSRT a b le

3 B iv ar ia te

co rr el at io n s

N o .

V ar ia b le s

1 2

3 4

5 6

7 8

9 1 0

1 1

1 2

1 D IV

_ ID

X 1

2 D IV

_ N E T

0 .9 9 7 3 *

1

3 R E L

0 .0 4 4 9 *

0 .0 4 8 4 *

1

4 L O G T A

0 .3 5 7 6 *

0 .3 5 4 0 *

0 .0 4 3 5 *

1

5 L O G M V E

0 .3 8 2 0 *

0 .3 7 8 7 *

0 .0 6 1 2 *

0 .8 0 2 3 *

1

6 M B V E

0 .0 7 2 5 *

0 .0 7 3 6 *

0 .0 1 2 2 *

- 0 .1 2 7 2 *

0 .2 1 3 6 *

1

7 C A P E X A

- 0 .0 1 8 7 *

- 0 .0 1 4 9 *

- 0 .0 1

- 0 .0 5 4 4 *

0 .0 6 8 7 *

0 .0 6 2 4 *

1

8 A D V R

0 .1 2 5 5 *

0 .1 2 5 4 *

0 .0 1 6 6 *

- 0 .0 8 5 2 *

0 .0 2 2 1 *

0 .1 5 1 1 *

0 .0 7 5 0 *

1

9 R N D R

- 0 .0 3 7 4 *

- 0 .0 3 6 8 *

- 0 .0 2 6 2 *

- 0 .3 4 6 7 *

- 0 .1 2 5 6 *

0 .2 6 4 8 *

- 0 .0 8 5 6 *

- 0 .0 3 4 3 *

1

1 0

D E B T R

0 .0 0 5 1

0 .0 0 5 5

- 0 .0 1 1 1

0 .2 3 6 7 *

0 .0 8 6 9 *

0 .0 5 0 5 *

0 .0 7 5 9 *

- 0 .0 6 2 2 *

- 0 .2 2 2 1 *

1

1 1

S A L E G

- 0 .0 6 5 3 *

- 0 .0 6 5 3 *

0 .0 0 4 4

- 0 .0 9 9 0 *

0 .0 1 7 8 *

0 .1 5 0 2 *

0 .0 8 1 5 *

- 0 .0 3 4 3 *

0 .0 9 7 0 *

- 0 .0 1 6 6 *

1

1 2

D E V R E T

- 0 .1 8 2 9 *

- 0 .1 9 7 2 *

- 0 .0 7 4 3 *

- 0 .3 6 6 2 *

- 0 .3 4 3 4 *

0 .0 5 1 6 *

- 0 .0 3 5 6 *

0 .0 1 8 3 *

0 .2 7 8 8 *

- 0 .0 8 7 9 *

- 0 .0 1 0 2

1

T h is

ta b le

re p o rt s S p ea rm

an co rr el at io n co ef fi ci en ts

am o n g v ar ia b le s o f m ai n in te re st

fr o m

1 9 9 1 to

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1 fo r v ar ia b le

d efi n it io n s

* In d ic at es

th e 5 %

le v el

o f si g n ifi ca n ce

o r le ss

Workforce Diversity and Religiosity 757

123

engagement is endogenous. The same issue affects diver-

sity and religiosity. To properly address this issue, we

attempt to conduct an endogeneity correction of diversity

scores by using the dynamic panel GMM regression fol-

lowing Wintoki et al. (2012).8 The dynamic panel GMM

model enables us to estimate the diversity/religiosity rela-

tion while including both past diversity ratings and fixed-

effects to account for the dynamic aspects of the diversity/

REL relation and time-invariant unobservable heteroge-

neity. Table 6 presents the regression results of dynamic

GMM. The results show that when we include fixed-effects

in a dynamic model and estimate via the system GMM, the

coefficient on REL in the diversity (both DIV_IDX and

DIV_NET) regressions are still positive and significant, at

the one percent level (t-values range from 2.62 to 3.10).

Because statistical significance remains close to those of

the fixed effect regressions, it seems that managers of firms

headquartered in areas with higher religiosity, i.e., more

religious communities, tend to engage in more diversity

initiatives. Overall, our dynamic GMM results support the

religious motivation hypothesis as opposed to the resource-

constraint hypothesis.

Reverse causality may also be a concern. It is unlikely

but perhaps not impossible that highly religious managers

of firms with high levels of workforce diversity practices

may demand more religiosity from their employees.

Table 4 Fixed effect regressions

Variables (1) (2) (3) (4) (5) (6)

DIV_IDX DIV_IDX DIV_IDX DIV_IDX DIV_NET DIV_NET

REL 0.0397*** 0.0329** 0.0312** 0.0328** 0.4166*** 0.3503**

(2.773) (2.097) (1.987) (2.092) (3.009) (2.314)

Control variables

LAG(LOGTA) 0.0066*** 0.0066*** 0.0671***

(4.781) (4.686) (5.067)

LAG(LOGMVE) 0.0048*** 0.0049*** 0.0480***

(4.722) (4.840) (4.874)

LAG(MBVE) -0.0001 -0.0001**

(-1.539) (-2.120)

LAG(CAPEXA) -0.0448*** -0.0513*** -0.0427** -0.0513*** -0.4498*** -0.5145***

(-2.663) (-2.975) (-2.482) (-2.980) (-2.770) (-3.091)

LAG(ADVR) -0.0639 -0.0759* -0.0749* -0.0752* -0.5566 -0.6802*

(-1.571) (-1.812) (-1.787) (-1.794) (-1.417) (-1.681)

LAG(RNDR) -0.0062 -0.0234 -0.0097 -0.0204 -0.0096 -0.1906

(-0.282) (-1.051) (-0.428) (-0.916) (-0.045) (-0.887)

LAG(DEBTR) 0.0118** 0.0220*** 0.0150*** 0.0231*** 0.1021* 0.2026***

(2.131) (3.798) (2.597) (3.986) (1.911) (3.628)

LAG(SALEG) 0.0017 0.0006 0.0016 0.0008 0.0107 0.0000

(1.076) (0.390) (1.008) (0.468) (0.689) (0.000)

DEVRET -0.0252* -0.0153 -0.0237 -0.0150 -0.2022 -0.1075

(-1.681) (-0.990) (-1.563) (-0.969) (-1.397) (-0.721)

Constant 0.2515*** 0.2645*** 0.2536*** 0.2634*** -0.5104*** -0.3677***

(20.011) (23.000) (19.214) (22.897) (-4.203) (-3.312)

YEAR DUMMY YES YES YES YES YES YES

Observations 25,506 24,825 24,821 24,820 25,506 24,825

Number of firms 4,162 4,132 4,131 4,131 4,162 4,132

R2 0.105 0.102 0.102 0.102 0.160 0.159

This table displays the baseline fixed effect regressions for the sample over the period of 1991–2010. The dependent variables are DIV_IDX in

models (1) through (4) and DIV_NET in models (5) and (6), respectively. We measure the degree of religiosity by the percentage of adherents

(= total adherents/total population) per county (REL). Robust t-statistics are presented in parentheses. See Table 1 for variable definitions. ***,

**, and * indicate statistical significance at the 1, 5, and 10 % level, respectively

8 The dynamic panel GMM model, in particular, enables us to

estimate the diversity-religiosity relation by dealing with (i) past

diversity scores due to autocorrelation problem of diversity ratings,

(ii) fixed-effects to account for the dynamic aspects of the diversity-

religiosity relation, and (iii) time-invariant unobservable heterogene-

ity, respectively.

758 J. Cui et al.

123

Table 5 Fixed effect regressions based on diversity strengths and diversity concerns

Panel A: The effect of religiosity (REL) on diversity strengths

Variables (1) (2) (3) (4)

DIVERSITY_STRENGTH DIVERSITY_STRENGTH DIVERSITY_STRENGTH DIVERSITY_STRENGTH

REL 0.3012*** 0.2243** 0.2165* 0.2239**

(2.933) (2.007) (1.935) (2.003)

Control variables

LAG(LOGTA) 0.0450*** 0.0456***

(4.576) (4.510)

LAG(LOGMVE) 0.0436*** 0.0442***

(6.153) (6.229)

LAG(MBVE) -0.0002 -0.0003

(-0.799) (-1.457)

LAG(CAPEXA) -0.2337* -0.2719** -0.1994 -0.2723**

(-1.941) (-2.214) (-1.627) (-2.217)

LAG(ADVR) -0.3409 -0.4601 -0.4745 -0.4563

(-1.170) (-1.540) (-1.588) (-1.528)

LAG(RNDR) 0.1324 0.0417 0.0960 0.0563

(0.840) (0.263) (0.593) (0.354)

LAG(DEBTR) 0.0546 0.1196*** 0.0584 0.1258***

(1.377) (2.902) (1.421) (3.041)

LAG(SALEG) 0.0021 -0.0072 0.0023 -0.0065

(0.183) (-0.617) (0.199) (-0.560)

DEVRET 0.0815 0.1927* 0.0901 0.1939*

(0.759) (1.748) (0.835) (1.759)

Constant -0.7597*** 0.0607 0.0672 0.0557

(-8.380) (0.747) (0.714) (0.686)

YEAR DUMMY YES YES YES YES

Observations 25,506 24,825 24,821 24,820

Number of firms 4,162 4,132 4,131 4,131

R2 0.122 0.106 0.106 0.107

Panel B: The effect of religiosity (REL) on diversity concerns

Variables (5) (6) (7) (8)

DIVERSITY_CONCERN DIVERSITY_CONCERN DIVERSITY_CONCERN DIVERSITY_CONCERN

REL 0.1153 0.1248 0.1157 0.1245

(1.403) (1.377) (1.275) (1.374)

Control variables

LAG(LOGTA) 0.0222*** 0.0229***

(2.818) (2.794)

LAG(LOGMVE) 0.0081 0.0087

(1.410) (1.515)

LAG(MBVE) -0.0003 -0.0003*

(-1.515) (-1.781)

LAG(CAPEXA) -0.2161** -0.2475** -0.2286** -0.2479**

(-2.242) (-2.485) (-2.300) (-2.488)

LAG(ADVR) -0.2158 -0.2104 -0.1927 -0.2069

(-0.925) (-0.869) (-0.796) (-0.854)

LAG(RNDR) -0.1420 -0.2171* -0.1430 -0.2026

(-1.126) (-1.688) (-1.089) (-1.572)

LAG(DEBTR) 0.0475 0.0881*** 0.0730** 0.0933***

Workforce Diversity and Religiosity 759

123

However, while it is intuitively understandable that reli-

giosity could lead a company to increase its diversity

activities, it is not conceivable that diversity policies could

generate higher levels of religiosity, and therefore, this

behavioral intuition mitigates the reverse causality

concern.

Discussion

Limitations

Using a large and extensive U.S. sample of firms during the

1991–2010 period, we find that managers of firms head-

quartered in areas with higher levels of religiosity engage in

more diversity activities, supporting the religiousmotivation

hypothesis, but not the resource-constraint explanation

based on agency theory. Our study, however, has a number

of limitations. First, while KLD is one of the oldest and most

respected independent CSR ratings in the world, and is

widely used by accounting, business ethics, economics,

finance, management, marketing, religious studies, and

strategy scholars, the KLD data has a number of shortcom-

ings. First, it does not reveal how it weights each screening

category in determining a firm’s overall diversity rating,

other than indicating the assignment of a binary (0 and 1)

code. Also, the KLD data does not indicate in which, if any,

of the firms it covers, the diversity levels may be a result of

legally mandated affirmative action programs (this may not

be a significant issue, however, since some scholars, e.g.,

Stainback and Tomaskovic-Devey (2012) have shown that

since the 1980s, and in spite of some landmark judicial

rulings, government has not required much in the way of

affirmative action). Moreover, in certain instances the KLD

data on which ratings are based are incomplete, particularly

with respect to the non-U.S. operations of the firms in its

database. A final caveat in our use of the KLD data is its

unbalanced panel structure and certain construct validity

issues (Chatterji et al. 2009). Sharfman (1996), nevertheless,

encourages researchers studying CSR to have confidence in

the KLDmeasures and feel secure in the idea that the data do

tap into the core of CSR.

Second, while this study uses various econometric

methods to deal with the endogeneity issue, the religiosity

data obtained from the American Religion Data Archive

(ARDA) is not available on an annual basis. Thus, we

employ the linear interpolation method following Hilary

and Hui (2009), Dyreng et al. (2010), Grullon et al. (2010),

and El Ghoul et al. (2012) to obtain values in the missing

years. Although the use of such a method to conduct var-

ious regressions is inevitable, we acknowledge that it could

introduce some potential interpolation bias.9

Third, one of the two rationales that we provide for our

hypothesis 1, assumes that the level of religiosity (REL) of

the population of an area (a county) can serve as a proxy or

indicator of the level of religiosity of the firm’s top man-

agers, who constitute a subset of that population. We are

Table 5 continued

Panel B: The effect of religiosity (REL) on diversity concerns

Variables (5) (6) (7) (8)

DIVERSITY_CONCERN DIVERSITY_CONCERN DIVERSITY_CONCERN DIVERSITY_CONCERN

(1.499) (2.635) (2.191) (2.781)

LAG(SALEG) 0.0086 0.0060 0.0074 0.0066

(0.933) (0.637) (0.789) (0.699)

DEVRET -0.2837*** -0.2780*** -0.2781*** -0.2760***

(-3.301) (-3.110) (-3.178) (-3.086)

Constant -0.5475*** -0.4579*** -0.5591*** -0.4627***

(-7.594) (-6.955) (-7.328) (-7.023)

YEAR DUMMY YES YES YES YES

Observations 25,506 24,825 24,821 24,820

Number of firms 4,162 4,132 4,131 4,131

R2 0.265 0.264 0.264 0.264

This table displays the baseline fixed effect regressions for the sample over the period of 1991–2010. The dependent variables are DIVER-

SITY_STRENGTH in Panel A and DIVERSITY_CONCERN in Panel B, respectively. We measure the degree of religiosity by the percentage of

adherents (= total adherents/total population) per county (REL). Panels A and B present the effect of religiosity on DIVERSITY strengths and

concerns, respectively. Robust t-statistics are presented in parentheses. See Table 1 for variable definitions. ***, **, and * indicate statistical

significance at the 1, 5, and 10 % level, respectively

9 As suggested earlier, based on direct survey data on religiosity

(1990 and 2000), we find the significant and positive relation between

diversity and religiosity measure, indicating that our linear interpo-

lation process does not create systematic bias in our main results..

760 J. Cui et al.

123

therefore using an indirect proxy to estimate the religiosity

of the firm’s top management group. We believe that our

use of this proxy is reasonable and, as we indicated earlier,

prior studies have used this proxy. However, our study

would be strengthened if we had a direct way to determine

the religious characteristics of the top managements of the

firms in the KLD database. For example, knowing the

specific religious commitment of the CEO of a firm would

provide a more direct measure of the degree of religiosity

of a firm’s top decision makers, and so a more direct way to

test the influence of religion on that firm’s diversity ini-

tiatives. Again, if we knew the specific religious affiliations

and commitments of the members of the top management

teams of companies in the KLD database, we could also

Table 6 Dynamic generalized method of moment (GMM) results

Variables (1) (2) (3) (4) (5) (6)

DIV_IDX DIV_IDX DIV_IDX DIV_IDX DIV_NET DIV_NET

REL 0.0619*** 0.0591*** 0.0593*** 0.0552*** 0.5216*** 0.4880***

(3.104) (2.894) (3.075) (2.774) (2.829) (2.620)

Control variables

LOGTA 0.0136*** 0.0141*** 0.1461***

(5.130) (5.559) (6.087)

LOGMVE 0.0109*** 0.0133*** 0.1233***

(3.933) (5.042) (4.551)

MBVE -0.0022** -0.003*** -0.0193* -0.028***

(-2.003) (-2.581) (-1.824) (-2.638)

CAPEXA -0.1096 -0.1372* -0.0988 -0.1109 -0.8474 -0.9704

(-1.532) (-1.911) (-1.350) (-1.538) (-1.224) (-1.381)

ADVR -0.1270 -0.1229 -0.1176 -0.1586 -0.7345 -1.1407

(-0.529) (-0.509) (-0.494) (-0.656) (-0.327) (-0.505)

RNDR -0.0941 -0.1974 0.0068 -0.0528 0.6254 -0.5183

(-0.626) (-1.266) (0.050) (-0.399) (0.511) (-0.414)

DEBTR 0.0263 0.0652*** 0.0355* 0.0752*** 0.2998* 0.5695***

(1.462) (3.447) (1.912) (3.905) (1.705) (3.155)

SALEG -0.0096 -0.031*** -0.0074 -0.0197* -0.0648 -0.1627*

(-1.073) (-3.221) (-0.811) (-1.893) (-0.751) (-1.784)

DEVRET 0.0399 0.0073 0.0410 0.0406 0.5939 0.4318

(0.659) (0.110) (0.724) (0.649) (1.161) (0.765)

DIVERSITY(T-1) 0.7823*** 0.8049*** 0.7856*** 0.8028*** 0.7798*** 0.7938***

(26.244) (25.934) (26.520) (26.219) (27.330) (27.639)

CONSTANT -0.092*** -0.054** -0.091*** -0.067*** -1.586*** -1.155***

(-3.165) (-2.053) (-3.379) (-2.660) (-5.910) (-4.332)

YEAR DUMMY YES YES YES YES YES YES

FF48INDUSTRY DUMMY YES YES YES YES YES YES

Observations 16,003 15,998 15,998 15,998 15,998 15,998

Number of firms 2,486 2,486 2,486 2,486 2,486 2,486

AR(1) test (p value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

AR(2) test (p-value) 0.5841 0.5971 0.6551 0.6237 0.6252 0.5817

Hansen test over-identification (p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Diff-in-Hansen test of exogeneity (p-value) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

This table displays dynamic GMM regressions during the period of 1991–2010. The dependent variables are DIV_IDX in models (1) through (4)

and DIV_NET in models (5) and (6), respectively. We measure the degree of religiosity by the percentage of adherents (= total adherents/total

population) per county (REL). The AR(1) and AR(2) tests are tests for first-order and second-order serial correlation in the first-differenced

residuals, under the null of no serial correlation. The Hansen test of over-identifying restrictions is a test with the joint null hypothesis that

instrumental variables are valid, i.e. uncorrelated with error terms. We use lagged two- to five-periods as instruments for endogenous variables.

All the regressors except industry dummies and year dummies are assumed to be endogenous. The difference-in-Hansen test of exogeneity is a

test with the null hypothesis that the subsets of instruments that we use in the levels equations are exogenous. Robust t-statistics are presented in

parentheses. See Table 1 for variable definitions. ***, **, and * indicate statistical significance at the 1, 5, and 10 % level, respectively

Workforce Diversity and Religiosity 761

123

use this information to get a more direct test of the influ-

ence of religion on diversity. Unfortunately, such data is

not easily available to us.

Fourth, we cannot provide empirical results or evidence

regarding the tolerance of other none-religious diversities

in the workplace due to the lack of such data and due to the

religious and cultural homogeneity in the regions of our

sample.

Fifth and related to the above, our study is limited to the

United States and its religious denominations. Scholars

have pointed out the unique role that religion plays in

American life, a role that is different from the roles it plays

in other nations. (Micklethwait and Wooldridge 2009).

Consequently, without further study, we cannot claim that

our conclusions necessarily apply to the managements of

other religions and nations. Moreover, our study focused

mostly on the Christian denominations. It will be fruitful if

some future studies can show whether the members of

other religions believe and act in a similar way.

Sixth, we note that the KLD database contains two kinds

of data regarding a firm’s diversity initiatives. Some of the

ten KLD items on diversity that we use in this study pro-

vide information only about what the firm’s policies are

with respect to some diversity area, while other items

provide information about what the firm has actually done

to incorporate women and minorities into its ranks. Of the

10 items we use, for example, 3 to 4 (depending on what

one counts as ‘‘policy information’’) are ‘‘policy’’ items,

and the other 6 to 7 report on the actual demographics of

the firm or its actual interactions with relevant external

parties. Our study would be stronger if the KLD database

provided more items about what each firm has actually

done to advance diversity, and fewer items that inform us

only about the diversity policies that firms have adopted.

Finally, we note that two forms of diversity that are

usually mentioned in discussions of diversity are not dis-

cussed in this study. We do not discuss the extent to which

firms have moved toward an inclusion of greater religious

diversity, nor whether firms have moved toward a greater

GLBT diversity. We omit these for two reasons. First, the

teachings of U.S. religions on diversity say little or nothing

about moving toward greater religious diversity; the chur-

ches do not see religious diversity as a value. Nor, as

mentioned above, do U.S. religious teachings agree on the

value of moving toward greater gay and lesbian diversity.

Because these two forms of diversity are not consistently

supported by the teachings of the dominant U.S. religious

denominations, we decided to omit them from our study.

Moreover, a second reason for omitting discussion of

religious diversity is that the KLD database says nothing

about religious diversity.

Overall, despite these limitations, we consider our main

empirical findings of a positive association between the

degree of religiosity and diversity engagement as an

important first step to understand the potential religiosity-

diversity nexus proposed by the view that the firm is a

human community and the belief of many religious people

that religion is the source of morality. Both diversity and

religiosity are very much moving targets, however. They

are now quite different from what they were 5 or 10 years

ago, and they will continue to evolve.

We believe that it will be fruitful if future studies can

gather adequate data about the specific religious affiliations

of the top management teams of companies, and conduct

empirical studies examining the relation between their

religious affiliations and their firm’s diversity engagement.

While their main focus is neither the specific religious

affiliation of top management, nor the religiosity-diversity

relation, we consider recent efforts of the Kutcher et al.’s

(2010) survey-based research (collecting employee’s

response regarding the religiosity-job stress relation) could

provide a viable method to pursue these issues. In addition,

investigating the relation between the CEO’s specific reli-

gious affiliation and other CSR initiatives, such as the

environmental performance of the firm, should also be

interesting. The influence of religion on women in the

boardroom may also be a subject of fruitful research. While

women represent about half of the U.S. population and half

of its workforce (U.S. Department of Labor, 2012), women

still fill just 14 % of board seats (Butler 2013).

Significance

Our study makes important contributions in a number of

domains. First, and of greatest significance, our study

shows that religion influences a firm’s position on work-

force diversity. Specifically, our study suggests that at least

one of the factors underlying managerial decisions related

to diversity is their religiosity, a factor that has only rarely

been examined in the prior literature.

Secondly, because employees are key stakeholders of a

company, the company’s diversity policies toward

employees are generally seen in the literature on CSR as

part of the company’s CSR stance (Mitchell et al. 1997;

Gibson 2000; Kaler 2002; Crane and Matten 2004). Our

study shows, therefore, that religion is an influence on a

firm’s CSR stance, at least to the extent that religion is one

of the factors that play a role in managerial decisions to

invest in diversity initiatives.

Third, our study provides additional evidence for the

claim that the teachings of religious denominations affect

the behaviors of their members or, at least, of those who

live in a community of religious adherents (Welch et al.

1991; Ellison et al. 1997; Regnerus 2003). Our study

therefore makes a contribution to the psychological and

sociological literature that examines whether and how

762 J. Cui et al.

123

religiosity influences behavior. Earlier studies have shown

that religion has an influence on the moral decisions of

adolescents (Brownfield and Sorenson 1991; Donahue and

Benson 1995; Baier and Wright 2001; Bearman and

Bruckner 2001); it affects the political actions of adults

(Manza and Brooks 1997; Regnerus et al. 1999; Greeley

and Hout 2006; Hirschl et al. 2009); it influences everyday

adult decisions (Schieman 2011); it is positively associated

with college student honesty (Perrin 2000); and it is cor-

related with adult intentions to obey the law (Grasmick

et al. 1991) as well as with adult intentions to refrain from

premarital sex (Barkan 2006). To this list, we can add that

religion also has an influence on management decisions to

invest in workplace diversity.

Fourth, as several scholars have suggested (Geyer and

Baumeister 2005; Welch et al. 2006; Melé 2012a, b), our

study shows that religious beliefs influence American busi-

ness life. In particular, we have shown that religious beliefs

influence corporate decisions related to workforce diversity

policies and religious actions.We note that our study showed

that religion exerts this influence regardless of how large the

firm is, or what its growth opportunities may be.

Fifth, our study provides at least part of the explanation

of why companies have continued to invest in diversity

programs in spite of the fact that research on diversity has

failed to show that diversity programs will generally pro-

vide economic benefits to the firm that adopts them. The

descriptive statistics in our study indicated that there is

some variance in the extent to which companies invest in

diversity. Our findings suggest, therefore, that although

some managers choose not to invest in diversity, one of the

factors that lead other managers to continue investing in

diversity is related to religion; specifically, managers invest

in diversity, at least in part, because their religion teaches

that the pursuit of diversity is morally right.

Sixth, our study also shows that managers do not single-

mindedly seek to maximize shareholder value. That is, the

fiduciary obligation to ‘‘maximize profits’’ for shareholders

that Friedman (1970) and others attribute to managers is

not the only obligation to which managers pay attention.

Managers balance their responsibilities to shareholders

with the moral responsibilities that religion says they owe

to others. In particular, they balance their responsibilities to

shareholders with the moral responsibility to reduce

workplace discrimination and to make the workplace a

more diverse and inclusive community.

Conclusion

In this paper, we examined the empirical association

between the degree of religiosity of the area in which a

firm’s headquarters is located and in which its top

managers live, and our workforce diversity index, in order

to determine the relative validity of the two competing

explanations of the relation between religiosity and diver-

sity, namely, the religious motivation hypothesis and the

resource-constraint hypothesis. Based on a large and

extensive sample of U.S. data on firms’ diversity engage-

ment and their managements’ degree of religiosity, we find

a positive association between the degree of religiosity and

workforce diversity engagement, implying that religiosity

encourages the inclusion of minorities, women, and the

disabled in the firm and throughout its ranks.

The empirical results of our study, which is based on a

sample of U.S. firms operating in the period 1991–2010,

suggest a positive association between diversity engagement

and religiosity after controlling for various firm character-

istics. In addition, when we employ dynamic panel gen-

eralized methods of moment (GMM) to control for

endogeneity issues, we still find a positive association

between diversity and religiosity. This positive association

remains robust under various econometric methods includ-

ing fixed-effect regressions and dynamic GMM regressions.

We believe that this robust positive association between

religiosity andworkplace diversity, supports the premise that

managers of firms in religious communities are more com-

mitted to workplace diversity, and it also supports the reli-

gious morality hypothesis, but not the resource-constraint

hypothesis. Our robust findings of a positive relation

between religiosity and diversity are also indirectly sup-

portive of the proposition by Geyer and Baumeister (2005)

and Melé (2012a, b) that religion is indeed a source of the

moral motivations of managers. We also note that this

positive religiosity-diversity relation is found in the U.S.

where the majority of the population with a religious identity

is Christian.

Acknowledgments We appreciate special issue guest editor, Joan

Fontrodona for his excellent guidance, and three anonymous referees

for many valuable comments

Appendix: Diversity Categories

Diversity Strengths (DIVERSITY_STRENGTH)

CEO. The company’s chief executive officer is a woman or

a member of a minority group.

Promotion. The company has made notable progress in

the promotion of women and minorities, particularly to line

positions with profit-and-loss responsibilities in the

corporation.

Board of Directors. Women, minorities, and/or the

disabled hold four seats or more (with no double counting)

on the board of directors, or one-third or more of the board

seats if the board numbers less than 12.

Workforce Diversity and Religiosity 763

123

Work/Life Benefits. The company has outstanding

employee benefits or other programs addressing work/life

concerns, e.g., childcare, elder care, or flextime. In 2005,

KLD renamed this strength from Family Benefits Strength.

Women & Minority Contracting. The company does at

least 5 % of its subcontracting, or otherwise has a

demonstrably strong record on purchasing or contracting,

with women and/or minority-owned businesses.

Employment of the Disabled. The company has imple-

mented innovative hiring programs; other innovative

human resource programs for the disabled, or otherwise has

a superior reputation as an employer of the disabled.

Other Strength. The company has made a notable commit-

ment to diversity that is not covered by other KLD ratings.

Diversity Concerns (DIVERSITY_CONCERN)

Controversies. The company has either paid substantial

fines or civil penalties as a result of affirmative action

controversies, or has otherwise been involved in major

controversies related to affirmative action issues.

Non-Representation. The company has no women on its

board of directors or among its senior line managers.

Other Concern. The company is involved in diversity

controversies not covered by other KLD ratings.

Source: KLD Research & Analytics, Inc. The KLD

original diversity strength scores also include the Gay &

Lesbian Policies: The company has implemented notably

progressive policies toward its gay and lesbian employees.

In particular, it provides benefits to the domestic partners

of its employees. In 1995, KLD added the Gay & Lesbian

Policies Strength, which was originally titled the Progres-

sive Gay/Lesbian Policies strength. The problem with this

item, however, is that a good number of the Christian

denominations do not support policies that benefit gays and

lesbians. In fact, several of the Christian denominations

have officially taken the position that such policies should

be rejected. Consequently, we remove the item of Gay &

Lesbian Policies from our measurement of DIVERSITY

scores because of continuing controversy.

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