New research from UGA and Southern Methodist University, published in Management Science, shows that the dominant local religion—whether Protestant or Catholic—significantly affects mutual fund behaviors.
Specifically, the findings show that mutual funds headquartered in heavily Catholic areas tend to take more risks and funds in heavily Protestant areas take less risks, said lead author Tao Shu, assistant professor of banking and finance in the Terry College of Business. The paper was co-authored with Eric Yeung of the Terry College and Johan Sulaeman of Southern Methodist University.
“Finding evidence that a local culture’s religious beliefs affect mutual funds’ risk-taking decisions is surprising because this a very competitive industry,” Shu said. “One would expect that profit chasing would eliminate all the impact of culture or anything else. But, surprisingly, a local culture’s religious beliefs still impact risk-taking decisions.”
Because mutual funds make up about half of all institutional investments in the U.S., the findings have widespread implications for how investors manage their money, he added.
According to Shu, it has been widely documented by surveys that while Catholics are more tolerant to speculative risk than the general population, Protestants are less tolerant to speculative risk than the general population.
“One suggestion is that many Protestant congregations are against gambling, but Catholic churches are more tolerant of it—they may even use lotteries to generate funding for the church,” Shu said.
Local religious beliefs can affect mutual fund behaviors in several ways. For example, local religious beliefs can affect a fund manager’s personal beliefs and in turn mutual fund behaviors, Shu said.
Yet, despite the risk-preference differences, the end results are about the same. The risk-taking associated with local religious beliefs does not lead to superior fund returns. The lesson for investors, then, is to ask riskier fund managers to play it safe.