Local Religiosity and Stock Liquidity

Abstract

We investigate whether local religious norms affect stock liquidity for U.S. listed companies. Over the period 1997–2020, we find that firms located in more religious areas have higher li-quidity, as reflected by lower bid-ask spreads. This result persists after the inclusion of addi-tional controls, such as governance metrics, and further sensitivity and endogeneity analyses. Subsample tests indicate that the impact of religiosity on stock liquidity is particularly evident for firms operating in a poor information environment. We further show that firms located in more religious areas have lower price impact of trades and smaller probability of information-based trading. Overall, our findings are consistent with the notion that religiosity, with its anti-manipulative ethos, probably fosters trust in corporate actions and information flows, especially when little is known about the firm. Finally, we conjecture an indirect firm value implication of religiosity through the channel of stock liquidity.

Keywords: Religiosity, Liquidity, Information Asymmetry, Bid-Ask Spread, Geographic Location, Religious Social Norms

JEL Classification: G31, G32, G40, G41, Z12