Asset pricing in a country embracing religious beliefs and social norms: Evidence from the Indonesian stock market

Abstract

The debate surrounding the financial performance of Shariah compliance (SC) and socially-responsible (SR) investments versus traditional ones remains controversial. This study pioneers an examination of this issue within Indonesia, a country where SC Investments (SCIs) and SR Investments (SRIs) are government priorities and widely embraced by investors. Our analysis, from July 2009 to June 2021, employing well-known five-factor and cross-section models, reveals that SCI underperforms conventional benchmarks, whereas SRI exhibits resilience. Our findings also suggest that investor preferences may contribute to the overvaluation of SCI and SRI assets. Additionally, we extend the existing literature by exploring corporate financing strategies, highlighting a preference for capital markets over bank borrowing among SC and SR companies. This research illuminates the multifaceted dynamics of SCIs and SRIs in a region prioritizing ethics and sustainability.