The causal effect of religious piety on shareholder wealth: evidence from acquirer returns and historical religious identification

Pandej Chintrakarn, Pornsit Jiraporn, Young S. Kim and Shenghui Tong

Applied Economics Letters, 2016, vol. 23, issue 15, 1110-1116

Abstract: Prior research shows that religion promotes honesty. Honesty in turn motivates managers to view an expropriation from shareholders as self-serving, opportunistic and unethical, thereby alleviating the agency conflict. Religious piety is thus expected to discourage agency-driven acquisitions that reduce shareholder wealth. We exploit the variation in religious piety across US counties (and states) and show that firms located in a more religious environment are indeed less likely to make poor acquisitions, measured by the stock market reactions to the acquisition announcement. To draw a causal inference, we use historical religious piety as far back as 1952 as our instrument. The two-stage least squares (2SLS) analysis confirms that religious piety induces firms to make better acquisitions. Our analysis based on propensity score matching also corroborates the conclusion.

Date: 2016
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DOI: 10.1080/13504851.2015.1137541

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