Religion and venture investing: A cross‐country analysis

• DOI: http://doi.org/10.1111/fire.12233
• Published date: 01 August 2020
• Author: Min Maung,Xiaowei Xu,Zhenyang Tang
• Date: 01 August 2020

DOI: 10.1111/fire.12233

ORIGINAL ARTICLE

Religion and venture investing: A cross-country

analysis

Min Maung1Zhenyang Tang2Xiaowei Xu3

1University of Saskatchewan, Saskatoon,

Saskatchewan, Canada

2Clark University, Worcester,MA, USA

3University of Rhode Island, Kingston, RI, USA

Correspondence

ZhenyangTang,Clark University, 950 Main

Street,Worcester, MA 01610, USA.

Email:ZTang@ClarkU.edu

Abstract

Using a sample of 56 countries over the 2000–2016 period, we doc-

ument lower levels of venture capital investments in more religious

countries. These results are not specific to any primary religion. Fur-

thermore, we show that the negative relation between religiosity

and venture investing mainly stems from risk aversion inherent in

religiosity. Our results are unlikely driven byeconomic clout, as we

show more religious countries in fact have higher levels of domes-

tic credit or nonfinancial investments, despite lower levels of ven-

ture investments. We also present several findings consistent with

risk aversion. Venture investments in more religious countries are

more likely to have successful exits and are less likelyto be foreign

or early-stage deals. Our results are robust to different measures of

venture investmentsand religiosity, and to alternative specifications

that account for endogeneity.

KEYWORDS

religion, religiosity, risk aversion, venturec apital

JEL CLASSIFICATIONS

G18, G24, Z12

1INTRODUCTION

Venture capitalists are a group of financial intermediaries that specialize in high-risk investments in start-up firms

(Gompers, 1995).They have been shown to play an important role in funding innovation, which could potentially affect

a country’s long-term technological and economic growth (Hellmann & Puri, 2000; Kortum & Lerner, 2000; Samila &

Sorenson, 2011). The levelof venture investing exhibits substantial variation across countries; however, studies on the

determinants of such variation havebeen limited (Jeng & Wells, 2000). In this study, we investigate how religion, or the

level of religiosity,in particular, affects venture investing.

Religion is universally present in almost all societies; many differences in legal systems and culture across

countries can find their roots in religion (North, Orman, & Gwin, 2013). Although how religion affects economic

growth has been extensively studied (see Barro & McCleary,2003; Guiso, Sapienza, & Zingales, 2006; Landes, 1998;

Financial Review.2020;55:433–460. wileyonlinelibrary.com/journal/fire c

2020 The Eastern Finance Association 433

434 MAUNG ETAL.

Weber, 1930), studies on religion and financial investments are much more recent. Hilary and Hui (2009), Bénabou,

Ticchi, and Vindigni (2015), Jiang, Jiang, Kim, and Zhang (2015), Adhikari and Agrawal (2016), and Chircop, Johan, and

Tarsalewska(2019) find that firms located in more religious locations or with religious CEOs invest less, especially in

risky and innovative projects.

Why does religion affect financial investments?The literature attributes it to the close connection between religion

and risk-taking. Stark and Bainbridge (1987) and Stark, Iannaccone, and Finke (1996) argue that being religious per se

can be viewed as a rational and risk-aversedecision. A risk-averse person is willing to forego certain contemporaneous

rewards and pleasures in life to avoid the risk of afterlife punishment such as going to hell (Miller & Hoffman, 1995).

Empirically, the close connection between risk aversion and religiosity has been documented in many studies, such

as Hilary and Hui (2009) and Noussair, Trautmann, Kuilen, and Vellekoop (2013). In addition to the greater risk aver-

sion shared by the general religious population, certain religions may further instill risk attitudes through teachings

and socioeconomic institutions. For example, gambling is strictly forbidden in Protestantism but not in Catholicism,

which results in greater risk tolerance of Catholics over Protestants (Adhikari & Agrawal,2016; Kumar, Page, & Spalt,

2011). While the effect of religiosity or religious intensity (regardless of whether a religious person is, say,Protestant

or Catholic) on risk-taking is negative, the effect of religion on risk-taking could be either positive or negativedepend-

ing on the religion. Thus, it is important to distinguish religiosity from primary religions; as Guiso et al. (2006) point out,

it is the intensity of religious beliefs or religiosity that affects economic attitudes.

We postulate that, due to the greater inherent risk in venture capital (VC) investing, risk aversion embedded in

religiosity can affect venture investments to a greater extent compared to other investments (Cumming, Fleming, &

Schwienbacher,2005; Gompers & Lerner, 2001; Ruhnka & Young,1991). While it is true that a vast majority of venture

investments are concentrated in risky industries,1this is not the only source that could contribute to the riskiness.

VCs usually havelimited historical financial information about the start-ups, and gathering information is costly (Groh,

von Liechtenstein, & Lieser, 2010). VCsalso have limited information about the growth potential of the firm and the

founding entrepreneur’s ability (Berger & Frame, 2007; Berger & Udell, 1998). Hence, unlike their more established

counterparts, venture firms contain higher adverse selection and agency costs (Cumming & Johan, 2013; Hain, Johan,

& Wang,2016), and are riskier.

In general, VCinvestors are risk tolerant. At the personal level, risk aversion may not deter certain individuals from

investing in VCprovided that these investors are properly rewarded. Much of the VC literature has also been devoted

to studying the tradeoff between VC risk and return, and mechanisms to mitigate these risks. However,in aggregate,

societies or countries that are comprised mainly of risk-averse individuals may see a disproportionately low share of

venture investments. Hence, the levelsof venture investments may be disproportionately low in more religious coun-

tries.

We analyze ventureinvesting in 56 countries from 2000 to 2016 and find that both the number and the dollar value

of VC investmentsare significantly lower in more religious countries. In contrast, the effect of a country’s primary reli-

gion on venture investing is not alwayssignificant. This negative association between religiosity and venture investing

may come from reduced entrepreneurial activities that demand less venture funds, which we define as the demand

effect, and/orlower investor willingness to supply funds available for venture investments, which we define as the sup-

ply effect. We show that our results likelycome from both the supply and demand effects.

Wenext investigate the mechanism behind these results. Our findings suggest that religiosity affects venture invest-

ing through the channel of risk aversion. We also find mixed evidence for attitudes toward science and technology2

but do not find support for other potential mechanisms such as investor protection, tax, or trust. Further,we examine

the secularization hypothesis, an important alternativeexplanation, which argues that economic development reduces

1According to the National VentureCapital Association Handbook (2016), for instance, almost 70% of the venture investments in 2015 were directed toward

informationtechnology and related industries.

2Religionalso shapes citizenry’s attitudes toward science and technology ( Bénabou et al., 2015; Scheufele, Corley, Shih, Dalrymple, & Ho, 2009), an important

determinantof venture investing.