How sukuk shapes firm performance

Abstract

With the large expansion of Islamic finance in the recent years, sukuk, which are the Sharia‐compliant substitute to conventional bonds, are now becoming more prominent. The aim of this study was to examine the impact of sukuk issuance on firm performance. To do so, we analyse how stock market performance and operating performance (OP) are influenced by issuance of sukuk and bonds on a sample of Malaysian listed companies. We consider the short‐term and medium‐term stock market reaction through the computation of cumulative abnormal returns and buy‐and‐hold abnormal returns. We investigate the impact on OP by performing regressions and by calculating abnormal operating performance (AOP) so that we can compare how issuance affects similar firms. We find that sukuk issuance generates a negative stock market reaction both in the short term and in the medium term. We also find evidence that issuing sukuk hampers OP. The analysis of AOP shows that sukuk issuers have better performance than their matched bond issuers, but that sukuk contributes to reduce the gap in performance over time. Overall, our results support the view that sukuk issuance hampers stock market performance, but that it is not attributable to a signalling effect on the bad financial situation of the issuer. We interpret our findings as evidence of adverse selection taking place on the financed projects and agency problems stemming from the specific sukuk structuring with stock market investors more reluctant to invest in sukuk issuers.

Nexus between risk sharing vs non-risk sharing financing and economic growth of Bangladesh

“…Although Sukuk are an equity-like structure which is comparatively more conservative than traditional debt instruments. However, incidents of Sukuk default have increased in recent times as reported by The National (2009), Aziz (2010), Khnifer (2010), Boey (2013) and Wijnbergen and Zaheer (2013), Halim et al (2017), Klein et al (2017), Smaoui and Khawaja (2017), Ariff et al (2018) and Borhan and Ahmad (2018), among others. Some of these recent defaults have created uncertainties in Sukuk and have given rise to negative implications as described by Laldin (2013) and Majid et al (2011).…”

The Sukuk Effect on Stock Return Volatility in Indonesia

“…Debt-based instruments such as Ijara (rent/lease agreement) and Murabaha (cost-plus sale) do not contain strict sense interest, but they pay a predetermined rate of turn to investors. Musharaka and Mudaraba are partnership contracts in which the financier and the entrepreneur share profits based on pre-agreed ratios, whereas losses are commensurate to their contribution to the partnership (Klein et al 2017).…”

“…Based on those backgrounds, there are problems in this research as the existence of a research gaps from the different findings researchers Sukuk announcement event (Khartabiel et al, 2019) on return volatility (Naufa et al, 2019), time-varying volatility (Bhuiyan et al, 2019), asymmetric effect (Aloui, Hammoudeh, & Hamida, 2015), and the trading volume of the stock (Wilson, 2008). Some researchers find that Sukuk issuance increases those variables (Haroon et al, 2019;Klein et al, 2017), while other researchers argue that Sukuk announcement reduces those variables (Bhuiyan et al, 2018;Hanefah & Sains, 2013). On the other hand, there are some researchers who discovered that Sukuk has no impact on those (Godlewski et al, 2013;Smaoui et al, 2019).…”

“…This trend has been driven by the growth of Islamic banking activities but also by the expansion of Sukuk. By the end, if 2013, the worldwide value of outstanding Sukuk was 270 billion dollars, representing 14.6% of global Islamic financial assets (Klein et al, 2017).…”

Islamic economics and Islamic finance in the world economy

“…In recent years, there has been increasing interest in sukuk with studies assessing not only the so-called wealth or value effect of sukuk issuance but also on modelling sukuk choice and sukuk default. This special issue also contributes to the increasing interest on sukuk with theoretical papers arguing a stabilising role of sukuk (Ismath Bacha & Mirakhor, 2017;Rizvi & Arshad, 2017) and an empirical paper evaluating the impacts on firms' values and operating performance of sukuk issuance (Klein, Weill, & Godlewski, 2017).…”