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Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible InvestmentAaron Z. Pitluck
Illinois State University - Sociology
March 2008
Abstract: "This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market. Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper argues that moral investment behavior in stock markets is shaped primarily by 'market structure' rather than by 'mandates.' In both countries mandates are a weak form of social control of fund manager's behavior. This is because mandates are not principal-agent contracts but are primarily marketing exercises and cultural tools. Social investing in the United States is weak because it relies solely on mandates to communicate clients' ethical desires to their fund managers. Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market's structure. Specifically, a uniform interpretation of Islamic investing was institutionalized with the creation of a nearly-unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future. The paper closes with implications for social investment in the United States."
This interesting paper provides a fairly good view of Islamic investment behaviour. Companies, in Malaysia for example, should leverage on the Islamic stock screening excercises as the demand for Shariah compliant stocks by Islamic funds will raise firm value. And for capital raising purpose, a Shariah compliant company can issue sukuks, which is highly sought for today. although quite many have defaulted as well.
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