Paying for Religion: Evidence from Islamic Bonds Prospectuses

Do religious beliefs impact asset prices? We offer a way to directly measure the economic impacts of religion. Employing the field of Islamic finance, we identify the role of religion on asset prices, through the use of religious words in Islamic bonds prospectuses. We link the occurrences of a broad set of religious terms, such as sharia, Islam, fiqh, and Allah, among others, to the yield-at-issuance of Islamic bonds. We control for a large array of confounding drivers, including documents wording, financial characteristics of the issuance and year fixed effects. The use of religious words systematically reduces the yield paid by issuers. The effect is sizeable. Multiplying the reference to religious principles further reduces the yield. We also show that the effect is different based on bonds’ risk, and that it exerts an impact on equity value. Several additional tests confirm the robustness of our findings. Notably, issuing a fatwa alongside an Islamic bond issuance also substantially reduces the yield. Overall, our findings directly identify and measure the effect of religious beliefs on the price of economic assets.