View from practice: Stock market reaction to sukuk credit rating changes in Malaysia

Abstract

Documented evidence on conventional bond markets shows negative market reaction to bond credit rating downgrade and no reaction to credit rating upgrade. Despite the fact that sukuk issuances make up more than 58.8% of the value of outstanding bonds in the country and Malaysia issues at least half of the world's sukuk and is widely recognized as a leader in the sukuk space, there is no documented evidence on the stock market reaction to sukuk credit rating changes. This study analyzed the wealth effect of sukuk credit rating changes in Malaysia using 16 sukuk upgrades and 20 sukuk downgrades for the period 2000–2014. The evidence shows negative market reaction to downgrades and positive significant reaction to sukuk rating upgrade. This symmetrical market reaction to sukuk credit rating changes implies the market was indifferent between bonds and sukuk from the credit rating perspective. This finding supports the notion that the credit rating agencies are Shariah‐neutral when rating these capital market instruments.

Determinants of Sukuk credit rating: evidence from issuing firms in Malaysia

“…Al Homsi et al (2019) examined the wealth effect of Sukuk credit rating changes in Malaysia using 16 Sukuk upgrades and 20 Sukuk downgrades for the period 2000–2014 and documented significant negative market reaction to downgrades and positive significant reaction to Sukuk rating upgrades. The symmetrical market reaction to Sukuk credit rating changes implies the market has no difference between bonds and Sukuk from the credit rating perspective.…”

“…The objective of credit rating is to reduce information asymmetries between issuer and investor (Arundina et al , 2015). This is achieved through the perceived credit rating that signals to the market the quality of the Sukuk issuance and allow investors to make objective assessment of the risk in their investment decisions (Al Homsi et al , 2019).…”