Religiosity and the Volatility of Stock Prices: A Cross-Country Analysis

Prior research argues that religiosity increases the ethical behavior and levels of risk aversion of firm managers. To the extent that this is true, more religious countries might exhibit more stability in stock prices. This study tests this assertion by determining whether religiosity in countries is negatively associated with volatility in financial markets. Using a unique empirical design, we account for the possibility that the structure of financial markets is endogenously related to a country’s religiosity by examining the volatility of American Depositary Receipts (ADRs) while conditioning on a number of home country variables capturing religiosity. We also control for the possibility of endogeneity bias by identifying an appropriate instrumental variable. Interestingly, our tests show that religious affiliation and, to a lesser extent, religious adherence and religious beliefs negatively affect the level of ADR volatility.