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Does local religiosity matter for bank risk-taking?

Author

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  • Adhikari, Binay Kumar
  • Agrawal, Anup
Abstract
We investigate whether local religiosity matters for risk-taking by banks. Banks headquartered in more religious areas exhibit lower stock return volatility, lower tail risk, and lower idiosyncratic risk. They also tend to be farther away from default as measured by their z-scores. But these banks command lower market valuations during normal times. These results stand up to several robustness checks, tests for mitigating endogeneity concerns, and are supported by an analysis of bank CEOs' religiosity. Moreover, banks in more religious areas remain less vulnerable to crises. To reduce risk, these banks grow their assets more slowly, hold safer assets, rely less on non-traditional banking, and provide less incentives to their executives to increase risks. Local religiosity has a more pronounced influence on risk-taking by banks for which local investors and managers are more important. Overall, this paper contributes to the literature by uncovering an important and previously unidentified determinant of risk-taking by banks, namely, religion-induced risk aversion.

Suggested Citation

  • Adhikari, Binay Kumar & Agrawal, Anup, 2016. "Does local religiosity matter for bank risk-taking?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 272-293.
    • Handle: RePEc:eee:corfin:v:38:y:2016:i:c:p:272-293
    DOI: 10.1016/j.jcorpfin.2016.01.009
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    More about this item

    Keywords

    Local religiosity; Bank risk-taking; Financial crises;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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