The Asset Pricing Consequences of Religious Beliefs and Social Norms

We introduce novel evidence in the research on religious and social norms in the Indonesian stock market with the same investigation method and observation period. In the sample period 2009-2021, we investigate Shariah-Compliant (SC) firms (publicly listed firms that follow the Jakarta Islamic Index or JII) and Socially-Responsible (SR) firms (publicly listed firms that follow the SRI-KEHATI Index). We hypothesize that religious and cultural preferences support norm-constrained investors willing to pay a financial cost to commit to investing in SC and SR companies (which support religious ethics and sustainability). Consistent with this idea, we find significant results that SC and SR stocks have lower expected returns than comparable equities. While investors overvalue SC stocks in the market - implying overpricing, SR stock prices tend to be neutral with respect to other stocks. Finally, there is significant evidence that SC and SR firms are less reliant on debt financing than the typical firm as a consequence of such norms and regulations