Abstract
We employ standard event study methodology to examine the stock price reaction to the issuance announcements of 237 Islamic bonds (Sukuk) versus 231 conventional bonds issued in twelve financial markets from 2005 to 2017. We further examine the effects of issuance announcement on shareholder wealth in multiple economic settings, pre-crisis, during the crisis, and post-crisis, using the recent financial crisis (2007–2009) as a benchmark. Using multiple regression model, we also attempt to identify the potential explanatory variables for the wealth effects. Our findings support existing literature: there is an insignificant market reaction for the announcements of Sukuk as well as conventional bonds in the pre-global financial crisis period of 2008. During the crisis period, market reaction is significantly negative for both groups. In the post-crisis period (which is the longest period and the largest sub-sample), the market reaction for Sukuk is positive and significant, apparently due to market participants’ new look, awareness and increased demand for Islamic financial products, whereas for conventional bonds the market reaction is insignificant. Additionally, our study finds supporting results for the signalling theory and the asymmetric information theory. Offer size has a significant positive impact on stock returns. In the pre-crisis period, large firms (with a higher asset base) generated abnormal returns. For the periods during and post crisis, large Sukuk issuers had higher abnormal returns. In addition, significant leverage is found for issuing bonds in post and during crisis periods.
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Notes
We utilize the Variance Inflation Factor (VIF) to assist in detecting the presence of multi-collinearity. VIF values more than 10 show presence of multi-collinearity in the data. The results of multi-collinearity show the following VIF values: CAAR (3.41), SIZE (2.32), FCF (3.07), and LEV (1.24), while the mean VIF value is found to be (1.37). Therefore, results indicate an absence of multi-collinearity of the model. To test for the autocorrelation (serial) the Durbin-Watson test is applied which indicates that the d-statistic = 1.994 (nearly 2) indicating that there is no autocorrelation. Eventually, the Breusch Pagan test is used to test for heteroscedasticity. The Chi square value obtained from the analysis is 434.65 while the p value is 0.000 therefore, we do not reject the null hypothesis which states the equality of variance, accordingly, we observe no heteroscedasticity.
We also follow Brown and Warner (1985) to test and report the statistical significance of CAARs applying a simple time-series test. The deviations from the assumption of underlying normal distribution of the time-series test are highly likely in event studies. Accordingly, we additionally apply various robust test statistics such as the Patell (1976) standardized residuals test that is robust to heteroscedastic event period abnormal returns and the standardized cross-sectional test introduced by Boehmer et al. (1991), which is robust to event-induced variance increases.
Historically, low liquidity has been a constraint in attracting Sukuk investors. However, changing perception and rising visibility have boosted demand for Sukuk thus improving their tradability and liquidity. Furthermore, more Sukuk are being rated and listed on global exchanges, leading to a gradual increase in the liquidity (Aljazira Capital 2014).
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Khartabiel, G., Abu-Alkheil, A., Tunku Ahmad, T.S. et al. Shari’ah-compliant Sukuk versus conventional bond announcements: is there a wealth effect?. Rev Quant Finan Acc 54, 1059–1073 (2020). https://doi.org/10.1007/s11156-019-00799-3
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DOI: https://doi.org/10.1007/s11156-019-00799-3