This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (overoptimistic/opportunistic) splits precede positive (negative) long‐term buy‐and‐hold abnormal returns. Using the calendar month portfolio approach, we show that the zero‐investment, ex ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre‐split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post‐split long‐term abnormal returns.
Investors hand billions of dollars across 131 countries to Islamic law-compliant funds that are often promoted as more socially responsible, less risky, and less prone to failure. Our empirical results indicate that the Shariah-compliant firms identified by Dow Jones do not have higher CSR scores, lower risk, or lower likelihood of failure than non-compliant firms. We address endogeneity using the instrumental variable (IV) approach and the selection bias using the propensity score matching method. Our results are similar when using Dow Jones, FTSE, and HSBC indices and when using CSR scores provided by multiple databases. We create an index to measure compliance with the Islamic law that overcomes several flaws in the binary measures currently employed in the industry. This index can help Shariah-compliant funds to fulfill their promise by constructing portfolios that are compliant with the Islamic law and are more socially responsible, less risky, and less prone to failure.
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