Skip to main content
SpringerLink
Log in

Religion, governance and performance: evidence from Islamic and conventional stock exchanges

  • Published:
Journal of Management & Governance Aims and scope Submit manuscript

Abstract

Based on a dataset of 31 conventional and Islamic stock exchanges we compare financial performance across these two groups for 2007–2011 period. Our results suggest that CEs and IEs are differently exposed to institutional constraints and have different drivers of profitability. Islamic stock exchanges’ performances are essentially driven by traditional listing and trading services and are affected by institutional factors such as the degree of foreign trading openness of their economies and measures of society development. Furthermore, they ensure greater stability during crisis, although Shari’ah compliant investments don’t affect their revenue generation. Conventional stock exchanges have higher trading intensity, higher level of revenues’ diversification and high capital investments, as they operate with different business models. Our results could have relevant business and strategic implications for further convergence between the two groups. Moreover our analysis could be significant for firms wishing to list their shares into Shari’ah Compliant Stock Exchanges or into Conventional ones and traders choosing the most convenient trading venue.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. We use the locution “conventional exchanges” (CEs) to refer to all those exchanges which do not fall within the Islamic world. We include, therefore, western (American and European exchanges) and Asian-pacific exchanges as long as the developing south African markets.

  2. In United Arab Emirates, the consolidation between their three stock exchanges is already in progress, as Dubai Financial Market bought in 2009 Nasdaq-Dubai. Paltrinieri (2012) shows that the combined effects of market fragmentation, financial crisis and collapse of trading values and market capitalization during the 2007–2011 period, could foster a full merger between Dubai Financial Market, Nasdaq-Dubai and Abu Dhabi Securities Exchange. Furthermore a potential merger between them could raise the issue of the relationship between Islamic and conventional stock exchanges, given that the holding company of Dubai Financial market and Nasdaq-Dubai, Borse Dubai, has major stakes in Borsa Italiana-LSE and Nasdaq-OMX.

  3. The Mudarabah contract is a partnership between the entrepreneur (mudarib) and at least one investor (rabb al-mal) where the latter provides financial resources (Aggarwal and Yousef 2000).

  4. The Organization of Islamic Cooperation (formerly Organization of the Islamic Conference) is “the second largest inter-governmental organization after the United Nations which has membership of 57 states spread over four continents. The Organization is the collective voice of the Muslim world and ensuring to safeguard and protect the interests of the Muslim world in the spirit of promoting international peace and harmony among various people of the world”. See http://www.oic-oci.org.

  5. Cost of revenues comprise high rebates for liquidity provision and routing fees to other market centres.

References

  • Abdull-Majid, M., Saal, D., & Battisti, G. (2010). Efficiency in Islamic and conventional banking: An international comparison. Journal of Productivity Analysis, 34, 25–43.

    Article  Google Scholar 

  • Aggarwal, R. (2002). Demutualization and corporate governance of stock exchanges. Journal of Applied Corporate Finance, 15(1), 105–113.

    Article  Google Scholar 

  • Aggarwal, R. K., & Yousef, T. (2000). Islamic banks and investment financing. Journal of Money, Credit and Banking, 32(1), 93–120.

    Article  Google Scholar 

  • Azzam, I. (2010). Stock exchange demutualization and performance. Global Finance Journal, 21, 211–222.

    Article  Google Scholar 

  • Baltagi, B. H., & Li, Q. (1991). A joint test of the serial correlation and random individual effects. Statistics and Probability Letters, 11(3), 277–280.

    Article  Google Scholar 

  • Baltagi, B. H., & Li, Q. (1995). Testing ar(1) against ma(1) disturbances in an error component model. Journal of Econometrics, 68(1), 133–151.

    Article  Google Scholar 

  • Beck, T., Demirguc-Kunt, A., & Merrouche, O. (2013). Islamic vs conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37(2), 433–447.

    Article  Google Scholar 

  • Bhargava, A., Franzini, L., & Narendranathan, W. (1982). Serial correlation and the fixed effects model. Review of Economic Studies, 49(4), 533–549.

    Article  Google Scholar 

  • Child, J., & Lu, Y. (1996). Institutional constraints on economic reform: The case of investment decisions in China. Organization Science, 7, 60–67.

    Article  Google Scholar 

  • Chowdhury, M. N. H., & Arifuzzaman, S. M. (2013). Examining awareness regarding Islamic banking among business graduates in Bangladesh. Journal of Islamic Economics, Banking and Finance, 9(1), 77–88.

    Article  Google Scholar 

  • Cihak, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2), 95–113.

    Article  Google Scholar 

  • Claessens, S., Djankov, S., & Klingebiel, D. (2000). Stock markets in transition economies. Financial Sector Discussion Paper, (5), The World Bank, September.

  • Claessens, S., Klingebiel, D., & Schmuckler, S. (2002).The future of stock exchanges in emerging economies: Evolution and prospects. The Wharton Financial Institutions Center, University of Pennsylvania, 4 February.

  • Di Noia, C. (2001). Competition and integration among stock exchanges in Europe: Network effects, implicit mergers and remote access. European Financial Management, 7(1), 39–72.

    Article  Google Scholar 

  • Drukker, D. M. (2003). Testing for serial correlation in linear panel data model. The Stata Journal, 3(2), 168–177.

    Google Scholar 

  • El-Gamal, M. A., & Hulusi, I. (2005). Inefficiency and heterogeneity in Turkish banking: 1990–2000. Journal of Applied Economics, 5, 641–664.

    Article  Google Scholar 

  • Erdogan, E., & Özlale, Ü. (2005). Effects of macroeconomic dynamics on stock returns: The case of the Turkish stock exchange market. Journal of Economic Cooperation, 26(2), 69–90.

    Google Scholar 

  • Financial Times. (2011). Islamic finance. Supplement, May 12.

  • Fleckner, A. M. (2006). Stock exchanges at the cross road. Fordham Law Review, 74(5), 2541–2620.

    Google Scholar 

  • Hayat, R., & Kraeussl, R. (2011). Risk and return characteristics of Islamic equity funds. Emerging Markets Review, 12(2), 189–203.

    Article  Google Scholar 

  • Hearn, B., Piesse, J., & Strange, R. (2011). The role of the stock market in the provision of Islamic development finance: Evidence from Sudan. Emerging Market Review, 12, 338–353.

    Article  Google Scholar 

  • Hearn, B., Piesse, J., & Strange, R. (2012). Islamic finance and market segmentation: Implications for the cost of capital. International Business Review, 21, 102–113.

    Article  Google Scholar 

  • Hoepner, A. G. F., Rammal, H. G., & Rezec, M. (2011). Islamic mutual funds’ financial performance and international investment style: Evidence from 20 countries. The European Journal of Finance, 17(9–10), 829–850.

    Article  Google Scholar 

  • Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). Strategy in emerging economies. The Academy of Management Journal, 43(3), 249–267.

    Article  Google Scholar 

  • IOSCO Technical Committee. (2001). Issues Paper on Exchange Demutualization. International Organization of securities commissions: 1–27.

  • Iqbal, Z. (1997). Islamic financial systems. Finance and Development, 34, 42–45.

    Google Scholar 

  • Iqbal, M., & Mirakhor, A. (2007). An introduction to Islamic finance: Theory and practice. John Wiley & Sons (Asia) Pte Ltd.

  • Jefferson, G.H., & Rawski, T.G. (1995). How industrial reform worked in China: The role of innovation, competition, and property rights. In Bruno, M., & Pleskovic, B. (Eds.), Proceedings of World Bank annual conference on development economics: 129–156, Washington, DC.

  • Kabir Hassan, M., & Suk-Yu, J. (2007). Stock exchange alliances in organization of Islamic conference countries. Review of Islamic Economics, Special Issue, 11, 123–148.

    Google Scholar 

  • Krishnamurti, C., Sequeira, J. M., & Fangjian, F. (2003). Stock exchange governance and market quality. Journal of Banking and Finance, 27(9), 1859–1878.

    Article  Google Scholar 

  • Kuran, T. (2004). Islam and Mammon: The economic predicaments of Islamism. Princeton: Princeton University Press.

    Book  Google Scholar 

  • Lau, C. M. (1998). Strategic orientations of chief executives in state owned-enterprises in transitions. In M. A. Hitt, J. E. Ricart i Costa, & R. D. Nixon (Eds.), Managing strategically in an interconnected world. Chichester: Wiley.

    Google Scholar 

  • Lee, J., & Miller, D. (1996). Strategy, environment and performance in two technological contexts: Contingency theory in Korea. Organization Studies, 17, 729–750.

    Article  Google Scholar 

  • McKean, J. E. (2009). The future of conflict between Islamic and western financial systems: Profit, principle and pragmatism, SSRN working papers.

  • McMillen, M. J. T. (2001). Islamic Shari’ah compliant project finance: Collateral security and financing structure case studies. Fordham International Law Journal, 24, 1184–1206.

    Google Scholar 

  • Meera, A. K. M., Omar, M. A., & Aziz, H. A. (2009). Dynamic linkages among ASEAN-5 emerging stock markets. International Journal of Emerging Markets, 4(2), 160–184.

    Article  Google Scholar 

  • Mendiola, A., & O’Hara, M. (2003). Taking stock of stock markets: The changing governance of exchanges. SSRN Working Paper, Cornell University.

  • Naughton, T., & Naughton, S. (2000). Religion, ethics and stock trading: The case of an Islamic equities market. Journal of Business Ethics, 23(2), 145–159.

    Article  Google Scholar 

  • Nejatullah, S. (2006). Islamic banking and finance in theory and practice: A survey of state of the art. Journal of Islamic Economic Studies, 13(2), 6.

    Google Scholar 

  • North, D. (1990). Institutions, institutional change and economic performance. New York: Cambridge University Press.

    Book  Google Scholar 

  • Oldford, E., & Otchere, I. (2011). Can commercialization improve the performance of stock exchanges even without corporatization. The Financial Review, 46(1), 67–87.

    Article  Google Scholar 

  • Oliver, C. (1997). Sustainable competitive advantage: Combining institutional and resource-based views. Strategic Management Journal, 18, 697–713.

    Article  Google Scholar 

  • Otchere, I. (2006). Stock exchange self-listing and value effects. Journal of Corporate Finance, 12(5), 926–953.

    Article  Google Scholar 

  • Otchere, I., & Abou-Zied, K. (2008). Stock exchange demutualization, self-listing and performance: The case of the Australian stock exchange. Journal of Banking and Finance, 32(4), 515–525.

    Article  Google Scholar 

  • Palmer, D. A., Jennings, P. D., & Zhou, X. (1993). Late adoption of the multidivisional form by U.S. corporations: Institutional, political, and economic accounts. Administrative Science Quarterly, 38, 100–131.

    Article  Google Scholar 

  • Paltrinieri, A. (2012). Stock exchange merger in the emerging markets: A case study of the United Arab Emirates. SSRN Working Paper: 1–37.

  • Peng, M. W., & Heath, P. S. (1996). The growth of the firm in planned economies in transitions: Institutions, organizations, and strategic choice. Academy of Management Review, 21, 492–528.

    Google Scholar 

  • Polato, M., & Floreani, J. (2008). Business diversification in the securities industry: Implications for the exchanges. Transition Studies Review, 15(2), 281–288.

    Article  Google Scholar 

  • Polato, M., & Floreani, J. (2013). The economics of the global stock exchange industry. London: Palgrave Macmillan.

    Google Scholar 

  • Richardson, C. F. (2006). Islamic finance opportunities in the oil and gas sector: An introduction to an emerging field. Texas International Law Journal, 42, 119–125.

    Google Scholar 

  • Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage.

    Google Scholar 

  • Shenkar, O., & von Glinow, M. A. (1994). Paradoxes of organizational theory and research: Using the case of China to illustrate national contingency. Management Science, 40, 56–71.

    Article  Google Scholar 

  • Soulsby, A., & Clark, E. (1996). The emergence of post-communist management in the Czech Republic. Organization studies, 17, 227–247.

    Article  Google Scholar 

  • Srairi, S. A. (2010). Cost and profit efficiency of conventional and Islamic banks in GCC countries. Journal of Productivity Analysis, 34, 45–52.

    Article  Google Scholar 

  • Steil, B. (2002). Changes in the ownership and governance of securities exchanges: Causes and consequences. Brookings Wharton Papers on Financial Services., 1, 61–91.

    Article  Google Scholar 

  • Suhomlinova, O. (1999). Constructive destruction: Transformation of Russian state-owned construction enterprises during market transition. Organization Studies, 20, 451–484.

    Article  Google Scholar 

  • Sullivan, J. D. (1998). Institutions and private sector development. China Economic Review, 9(1), 85–95.

    Article  Google Scholar 

  • Temple, J., & Voth, H. J. (1998). Human capital, equipment investment and industrialization. European Economic Review, 42, 1343–1362.

    Article  Google Scholar 

  • Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press, pp. 1, 2, 4, 10.

  • Worthington, A., & Higgs, H. (2005). Market risk in demutualised self-listed stock exchanges: An international analysis of selected time-varying betas. SSRN working paper: 1–20.

  • Zechner, J., Pagano, M., & Roell, A. A. (2002). The geography of equity listing: Why do companies list abroad? The Journal of Finance, 57(6), 2651–2964.

    Article  Google Scholar 

Download references

Acknowledgments

Our thanks go to the participants at Wolpertinger Conference 2014, held in Gotheborg, Sweden, and at AIB-SE Conference 2014 at Georgia Tech University, Atlanta, USA. We also appreciate the valuable suggestions provided by two anonymous referees at both conferences. We are grateful to Dan Bello for organizing Journal of International Business Studies (JIBS) special session at the AIB-SE Conference 2014 and inviting our paper. We acknowledge all the participants at JIBS special session, and in particular we would like to thank John Hulland for the strong reviewer of our paper. Finally we thank the reviewers of Journal of Management and Governance. All remaining errors are own.

Conflicts of interest

The authors declare that they do not have conflicts of interest.

Author information

Authors and Affiliations

  1. University of Udine, Via Tomadini 30, 33100, Udine, Italy

    Maurizio Polato, Josanco Floreani & Andrea Paltrinieri

  2. University of Verona, Via dell’Artigliere 19, 37129, Verona, Italy

    Flavio Pichler

Authors
  1. Maurizio Polato
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Josanco Floreani
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Andrea Paltrinieri
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Flavio Pichler
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Maurizio Polato.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Polato, M., Floreani, J., Paltrinieri, A. et al. Religion, governance and performance: evidence from Islamic and conventional stock exchanges. J Manag Gov 20, 591–623 (2016). https://doi.org/10.1007/s10997-015-9312-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10997-015-9312-6

Keywords

JEL Classification

Search

Navigation