Social norms and information asymmetry: the effect of religion on informed trading

ABSTRACT

This study investigates whether social norms impede informed trading. We use intraday data from Boursa Kuwait for January 2015 to December 2018, which clearly identifies institutions' religious identity. Consistent with our hypothesis, we find that the Islamic values of equality and trust lead to lower information asymmetry. Specifically, stocks of Islamic institutions experience lower informed trading in comparison to the stocks of non-Islamic institutions.

KEYWORDS:

• PIN
• islamic values
• stock market

Acknowledgments

The authors are grateful to Abdulaziz Alali from Kuwait University for his constructive help on coding.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Islamic finance offers a clear setting to observe the behavior of firms and individuals with religious values and has grown significantly over the last few decades, making it a noticeable financial phenomena (Gheeraert 2014) and research field (Ibrahim 2015; Zulkhibri 2015; Masih, Kamil, and Bacha 2018)

2 The Quran states that: Allah commands justice, the doing of good and liberty to kith and kin, and He forbids all shameful deeds, and injustice and rebellions (AlQuran, 16:90). This verse demonstrates that Islam discourages followers from engaging in any activities that can cause harm, exploitation, or lead to injustice to others.

3 For more information, see the law (No. 7, 2010) of the CMA, Clauses 204–209.

4 For an accurate parameter estimation, the original PIN measure is typically estimated over a sample of at least 60 days (Easley, Hvidkjaer, and O'hara 2002).

5 Following previous studies, to minimize the influence of outliers, we take the natural logarithm of the firm's market capitalization (Galema, Plantinga, and Scholtens 2008; Hong and Kacperczyk 2009).