Does Religion Affect Stock Markets and Institutional Investor Behavior?

Abstract

Socially responsible (SR) investing based on religious beliefs is experiencing robust growth. While the prior literature has related investment behavior to investors’ religious backgrounds, whether a religious authority’s stock preferences affect equity markets is far less understood. In this paper we study the relevance of a well known religiously motivated stock index, the MSCI US Catholic Values Index (CV400), which is based on opinions of the Catholic Church, to stock market activity and to mutual fund manager behavior. We examine the price and comovement effects of additions and deletions to the index and hypothesize that fund managers located in predominantly Catholic regions (1) show preferences for CV400 stocks relative to the rest of the market and (2) actively trade on changes to the index. We find that generally, CV400 index changes have no impact on constituent stocks’ prices and comovement with their index peers. Catholic managers tilt more towards CV400 stocks than Protestant managers. However, Catholic managers only actively trade in reaction to index changes instigated by a religious authority in a similar manor as they trade in stocks with corresponding financial characteristics. Taken together, our results suggest that institutional investors value the SR attribute of a stock only if the asset would have been chosen on its financial merits alone.

Keywords: Religion, SRI, Invesments, Fund Managers

JEL Classification: G23