Religiosity and loss aversion: Does local religiosity influence the skewness of stock returns?

Traditional asset pricing theory rests on the assumption that stock returns are normally distributed. However, research shows that instead of being normally distributed, stock returns are often positively skewed. In this study, we attempt to explain this phenomenon by taking a unique approach. In particular, we test the hypothesis that religiosity can influence the normality of the return distribution. Our tests are motivated by the idea that religion is an integral part of the culture within a society that influences managerial decision‐making. Local religiosity (or lack thereof) can shape the values, beliefs and decisions of managers including those related to the types of investments that are attractive. We hypothesize that in more religious cultures, individuals will be more loss averse since religion may be used as an attempt to avoid very unfavorable outcomes (Hell). Managers in these religious cultures, therefore, may be attracted to capital investment projects that avoid tail risk, which may help explain the positive skewness of the return distribution of stocks. Empirical results seem to confirm our hypothesis.