Are Sukuk Really Special ? Evidence from the Malaysian Stock Exchange

Are Sukuk Really Special ? Evidence from the Malaysian Stock Exchange

by: Christophe J. Godlewski & Rima Turk-Ariss & Laurent Weill

EM Strasbourg Bussiness School
(Université de Strasbourg)
with
European Research Group
“Money, Banking & Finance”
Financial and Monetary European Integration Group
Workshop on Islamic Finance
in Strasbourg
What Islamic Finance does (not) change
March 17th,, 2010,, EM Strasbourg Business School

Abstract:

The last decade has witnessed rapid expansion of Islamic financial instruments with notably

the proliferation of Islamic investment certificates called Sukuk. Since Sukuk represent an

alternative instrument to conventional bonds, it is of interest to evaluate the economic

differences between these financing techniques and appraise the implications on the future

expansion of Sukuk. We use a market-based analysis to investigate whether investors react

differently to the announcements of the issues of Sukuk and conventional bonds. We find that

stock markets are neutral to the announcement of conventional bonds, but we observe a

significant negative stock market reaction to the announcement of Sukuk. We explain this

different reaction of stock markets by the adverse selection mechanism which favors the use

of Sukuk by lower-quality debtor companies. Unlike arguments presented in prior literature,

our results support the view that differences exist between Sukuk and conventional bonds

because the market is able to distinguish among these securities. They also suggest some

detrimental effects of Sukuk expansion as these instruments adversely affect firm value, at

least in the short run.

JEL Codes: G14, P51

Keywords: financial instruments, Islamic finance, sukuk, event studies.

source: http://www.em-strasbourg.eu/ems/ems-workshop-on-islamic-finance-33.html