The causal effect of religious piety on shareholder wealth: evidence from acquirer returns and historical religious identification

• Main Authors: Pandej Chintrakarn, Pornsit Jiraporn, Young S. Kim, Shenghui Tong
• Other Authors: Mahidol University
• Format: Article
• Published: 2018
• Subjects: Economics, Econometrics and Finance
• Online Access: https://repository.li.mahidol.ac.th/handle/123456789/43625

© 2016 Taylor & Francis. Prior research shows that religion promotes honesty. Honesty in turn motivates managers to view an expropriation from shareholders as self-serving, opportunistic and unethical, thereby alleviating the agency conflict. Religious piety is thus expected to discourage agency-driven acquisitions that reduce shareholder wealth. We exploit the variation in religious piety across US counties (and states) and show that firms located in a more religious environment are indeed less likely to make poor acquisitions, measured by the stock market reactions to the acquisition announcement. To draw a causal inference, we use historical religious piety as far back as 1952 as our instrument. The two-stage least squares (2SLS) analysis confirms that religious piety induces firms to make better acquisitions. Our analysis based on propensity score matching also corroborates the conclusion.