The Stock Liquidity of Banks: A Comparison between Islamic and Conventional Banks in Emerging Economies

We explore the stock liquidity of Islamic banks (IBs) and matching conventional banks (CBs) in emerging economies. We find that IBs have higher stock liquidity than CBs, suggesting that investors prefer IBs' stocks and neglect what they consider to be “sin stocks” (i.e., CBs' stocks), which do not conform to their religious beliefs. We also find that the liquidity effects are particularly important for small IBs, and during the global financial crisis. This evidence is stronger in countries with less developed banking sectors and weaker bank supervision and regulation. Hence, faith-driven investors tend to value more norm-conforming stocks (i.e., IBs) during times of distress and uncertainty, and in weaker regulatory environments.