Essays on religious beliefs and stock market outcomes

This thesis consists of three essays that investigate the influence of religious beliefs on investor behavior and stock market outcomes. To this end, we avail of data from the Gulf Cooperation Council (GCC) countries. Our dataset is collected from highly religious societies that have clear religious investment rules and explicit identification of both institutional investors and stocks as either “Islamic” or “non-Islamic”. The first essay of this thesis investigates whether religious-based trading practices impede market development. Our results show that non-Islamic stocks in the markets of our study are relatively neglected, have higher returns, lower liquidity, and face higher liquidity risk compared to Islamic stocks. Our overall evidence, therefore, supports the hypothesis of market segmentation. Our results highlight a potential challenge for the stock markets of religious Islamic societies in seeking to become globally competitive. The second essay investigates whether religiosity affects stock market speculation. We find that an increase of Muslims’ religiosity during the holy month of Ramadan leads to lower levels of trading frequency, market volatility, and idiosyncratic volatility, as well as higher risk-adjusted returns. Our results indicate that religiosity is negatively related to stock market speculation. The third essay investigates whether religiosity influences the preference of institutional investors to hold lottery-type stocks. We find that Islamic institutional investors deviate from their religious norms by holding more lottery-type stocks than do non-Islamic institutional investors. This deviation may be explained by the evidence that Islamic institutional investors have stronger information signals to induce them to trade lottery-type stocks. Our results highlight a challenge for the regulators and Islamic Shariah auditors in countries that have Islamic institutions, namely, to ensure that the operations of Islamic institutions are free from prohibited excessive uncertainty (Gharar).