Does Local Religiosity Matter for Bank Risk-Taking?

66 Pages Posted: 18 Aug 2014 Last revised: 18 Nov 2015

See all articles by Binay Adhikari

Binay Adhikari

University of Texas at San Antonio

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration

Date Written: July 20, 2015

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.

Keywords: Local religiosity, Religion, Bank risk-taking, Financial crises

JEL Classification: G21, G01, G02

Suggested Citation

Adhikari, Binay Kumar and Agrawal, Anup, Does Local Religiosity Matter for Bank Risk-Taking? (July 20, 2015). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2465052 or http://dx.doi.org/10.2139/ssrn.2465052

Binay Kumar Adhikari (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
2104585349 (Phone)

Anup Agrawal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
EFLS, Box 870224
Tuscaloosa, AL 35487-0224
United States
205-348-8970 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://aagrawal.people.ua.edu/

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