Managers’ religious beliefs and Cost of capital: A Model with Islamic finance approach

Abstract

In recent years, religiosity as an important part of human culture has attracted the attention of many researchers. The present study thus employs structural equation modeling approach with the aim of investigating the relationship between managers’ religious beliefs and corporate cost of capital. In doing so, three various methods including OSM, capital asset pricing model and earnings-to-adjusted industry price were employed to measure the cost of capital. To compute the religious beliefs, the questionnaire designed by Khodayarifard et al (2013) was used. The questionnaire of interest is sent to 141 managers, among which 92 ones were answered back. Having ensured the good-fitness of the structural and measurement models, the research found that manager’ religious beliefs increases investors’ trust and market participation, which, in turn, mitigates cost of capital. The research findings not only fill research gap within the domain of Islamic finance, but also help investors, capital market regulators and other stakeholders make informed decisions.

Keywords

• religiosity
• managers’ religious beliefs
• cost of capital
• islamic finance approach
• structural equation