Religion and Stock Price Crash Risk

Abstract

This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion, as a set of social norms, helps to curb bad-news-hoarding activities by managers. Our evidence further shows that the negative relation between religiosity and future crash risk is stronger for riskier firms and for firms with weaker governance mechanisms measured by shareholder takeover rights and dedicated institutional ownership.

Short interest and stock price crash risk

“…11 Callen and Fang (2013a) find that equity ownership by transient institutions is positively related to future crash risk. Callen and Fang (2013b) provide evidence that firms headquartered in locations with higher levels of 10 The prior literature also documents that future stock price crash risk is associated with divergence of investor opinion (Chen, Hong, and Stein (2001)); and political incentives in state-controlled Chinese firms (Piotroski, Wong, and Zhang (2010)). 11 Kothari, Shu, and Wysocki (2009) use stock market responses to voluntary disclosure of specific information to infer bad news hoarding.…”

“…Kim, Li, and Zhang (2011b) contend that managers of firms with high levels of risk-taking are concerned about investor's perception of firm riskiness and will hide risk-taking information in order to support share price. Callen and Fang (2013b) also argue that managers of firms with high levels of risk-taking are more likely to conceal and hoard bad news information from investors because bad news may be perceived by investors to be the realization of excessive risk taking behavior by managers. These studies are consistent with the report of Wall Street Journal (2010) that "major banks have masked their risk levels in the past five quarters … worried that their stocks and credit ratings could be punished".…”

Research in finance: A review of influential publications and a research agenda

“…New methods used by studies in the Tier 1 finance journals include magnetic resonance imaging (Frydman et al, 2014), genetic testing (Cronqvist and Siegel, 2014), IQ testing (Grinblatt et al, 2012), psychometric tests (Graham et al, 2013), measures of CEO narcissism (Aktas et al, 2016), as well as measures of happiness and optimistic trading (Kaplanski and Levy, 2010). This stream of literature also includes research on religious beliefs (Callen and Fang, 2015), measures of culture (Nahata et al, 2014), disposition (Ye, 2014), experimental markets (Chelley-Steeley et al, 2015), prenatal environment and investment behavior (Cronqvist et al, 2015) (Cronqvist et al, 2016) , CEO narcissism and takeovers (Aktas et al, 2016), and the effect of limited attention caused by marital issues on hedge fund managers returns (Lu et al, 2016). To date, Behavioral Finance is the clear leader among the emerging research fields, in terms of number of articles published, and a corresponding trend is visible in Asia-Pacific finance journals, with publications increasingly arguing for the need to explain behaviors outside of traditional expectation models (Gippel, 2015a, b).…”

Religiosity and risk-taking in international banking

“…The first category focuses on the relationship between religiosity and corporate ethics. For example, Callen and Fang (2015) demonstrate that US companies located in counties with higher religiosity have a lower risk of stock price crashes; they attribute this outcome to religious social norms reducing the managerial hoarding of bad news. Kanagaretnam et al (forthcoming) report that banks located in countries with higher religiosity engage less in opportunistic income-increasing earnings management.…”