Sukuk and conventional bonds: shareholder wealth perspective

Mohamed Sherif, Cennet Tuba Erkol

Research output: Contribution to journalArticle

Abstract

Purpose: This study aims to comprehensively examine the stock market effects of announcements by firms to issue conventional bonds versus Sukuk. In addition, the authors investigate whether the choice of instrument depends on the tax status and government backing of the issuing firm. They split the sample into whole (2000-2015), pre-crisis (2000-2007) and post-crisis (2010-2015) subsamples. Design/methodology/approach: The authors use event study methodology, market model and FTSE Bursa Malaysia EMAS index on 14 different event windows of which five are symmetric and nine are asymmetric. Further, parametric and distribution-free tests are used to investigate the difference of cumulative abnormal returns when using the two instruments (Sukuk and conventional bonds). For the choice of issuing conventional bonds or Sukuk, Heckman procedure is employed to control for the self-selection of the announcement effects. Findings: The analysis indicates only insignificant difference in reaction to Sukuk and conventional bond issuances for the overall period and pre-crisis period. However, and importantly, they find strong evidence supporting the Malaysian stock abnormal return reaction to Sukuk compared to conventional bond issuances after the global financial crisis. Interestingly, they find that tax incentives and government backing are significant determinants in issuing Sukuk over conventional bonds. Such evidence is confirmed when using a wide range of robustness checks including four different market indices and both parametric and non-parametric tests. Research limitations/implications: The empirical analysis is subject to limitations. First, the sample is limited to Sukuk issues domiciled in Malaysia. Second, given that Sukuk are collateralized whereas conventional bonds are not, it would only seem logical for the former to be issued by riskier firms whereas the latter would be issued by stronger firms with stable cash flows. The future research can explore this issue some more. Finally, comparing Sukuk with other similar ethical sources of traded capital may provide insights into the globalization of such economic, trade and financial reforms in and outside Malaysia. Originality/value: To the author’s knowledge, no research has been conducted studying the differential and conflicting results to announcement of Sukuk issuance in the literature, nor the stock market effects of announcements to issue Sukuk over the pre-crisis (2000-2007) and post-crisis (2010-2015) periods. Thus, the study attempts to assess previous findings and contribute additional evidence that investigates the issue in rich setting.

LanguageEnglish
Pages347-374
Number of pages28
JournalJournal of Islamic Accounting and Business Research
Volume8
Issue number4
DOIs
StatePublished - 9 Apr 2017

Fingerprint

Shareholder wealth
Announcement
Malaysia
Government
Stock market
Market index
Robustness
Design methodology
Announcement effect
Tax incentives
Globalization
Nonparametric test
Economic reform
Event study methodology
Global financial crisis
Financial reform
Distribution-free
Cash flow
Market model
Logic

Keywords

  • Conventional bond
  • Ethical finance
  • Financial instruments
  • Malaysia
  • Shareholder wealth
  • Sukuk

Cite this

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Sukuk and conventional bonds : shareholder wealth perspective. / Sherif, Mohamed; Erkol, Cennet Tuba.

In: Journal of Islamic Accounting and Business Research , Vol. 8, No. 4, 09.04.2017, p. 347-374.

Research output: Contribution to journalArticle

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