Does an Islamic label cause stock price comovements and commonality in liquidity?

In this article, we examine the effects of shared beliefs and the personal preferences of individual investors on their trading and investment decisions. We expect that the process of classifying stocks into Sharia-compliant (Islamic) and non-Sharia-compliant (conventional) has an effect on the investibility and acceptance of the stocks especially by unsophisticated or individual investors. The wider acceptance of Islamic stocks among individual investors promotes and facilitates the circulation of firm-specific information among certain groups of investors. Our results indicate that stock classification has an effect on stock price comovements through increased stock trading correlation among the groups of Islamic investors. The commonality in preferences among holders of Islamic stocks generates commonality in trading activity and in stock liquidity. We find that classifying a stock as an Islamic stock increases its price comovement with other Islamic stocks and also increases its commonality in liquidity.