Religion and returns in Europe

Abstract

Drawing on social identity and social impact theory, this paper is the first to investigate the impact of religious preferences on share prices and expected returns at the country level. Using data from 12 European countries, our findings suggest that religion has a significant effect on the share price of companies whose activities are considered unethical, i.e., tobacco manufacturers and alcohol producers. The share price of these companies (called sin stocks) is depressed when they are located in a predominantly Protestant environment (relative to a Catholic environment). With investors in Protestant countries being more sin averse than in Catholic countries, they insist upon higher expected returns on sin stocks. Conversely, religious preferences do not have the same impact on the performance of other companies, e.g. socially responsible companies. Our results are robust to various methodologies and controlling for several firm-specific, industry-specific and country-specific characteristics.

The Opportunity Cost of Negative Screening in Socially Responsible Investing

“…These controversial stocks might be undervalued as a result of being neglected by norm-constrained investors (e.g., pension funds). The above findings have been confirmed by Durand et al (2013b) for the US, Salaber (2013) for Europe, Visaltanachoti et al (2009) for China and Hong Kong, and Capelle-Blancard and Monjon (2014) for France. A global study by Fabozzi et al (2008) finds similar results for the classical controversial sectors combined with defense, biotech (comprising animal testing, genetic engineering, and ordinary stem cells), and adult entertainment.…”

“…The Total Return index is created by DataStream to depict a stock's theoretical growth in value, assuming that dividends are reinvested. This is in line with Lobe andWalkshäusl (2011) andSalaber (2013). Additionally, although not very common in the literature, we carefully and systematically address zeroreturns in stocks' return series.…”

“…Kumar et al 2011;Kiymaz 2012;Durand et al 2013a;Salaber 2013;Scholtens and Sievänen 2013;Hood et al 2014).…”

“…While some find positive abnormal returns for sin stocks (e.g., Hong and Kacperczyk 2009), others do not find them at all Lobe and Walkshäusl (2011) and conclude that shunning these sin stocks does not significantly impact financial performance (Salaber 2009;Humphrey and Tan 2014). As to the number of stocks (and their combined market capitalization) to be invested in, various studies have suggested that screening has a fairly small impact (Fabozzi et al 2008;Hong and Kacperczyk 2009;Salaber 2009;Durand et al 2013a, b;Salaber 2013;Humphrey and Tan 2014). Lastly, most previous research has left unexplored a wide range of issues other than the widely studied combination of tobacco, alcohol, and gambling stocks (known as the Triumvirate of Sin).…”

“…Durand et al (2013a) even observe negative risk-adjusted returns for controversial stocks in the Pacific-Basin markets. Lastly, outperformance of sin stocks may be contingent on religious and legal factors (Salaber 2013).…”