How sukuk shapes firm performance

• Author: Laurent Weill,Paul‐Olivier Klein,Christophe J. Godlewski
• Date: 01 March 2018
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/twec.12509

SPECIAL ISSUE ARTICLE

How sukuk shapes firm performance

Paul-Olivier Klein

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Laurent Weill

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Christophe J. Godlewski

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1

University of Strasbourg, Strasbourg, France

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EM Strasbourg Business School, University of Strasbourg, Strasbourg, France

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University of Haute Alsace & EM Strasbourg Business School, Strasbourg, France

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INTRODUCTION

There was an impressive development of Islamic financial activities in the world in the last decade,

with worldwide Islamic financial assets rising from USD 150 billion in the mid-1990s to USD 1.8

trillion by end of 2013.

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This trend has been driven by the growth of Islamic banking activities

but also by the expansion of sukuk. By end of 2013, worldwide value of outstanding sukuk was

US$270 billion, representing 14.6% of global Islamic financial assets.

What are sukuk? They are the alternative mode of financing to bonds that is compliant with the

Islamic law (Sharia). Sukuk are investment certificates which can be issued by companies and

countries, with similarities and differences with bonds. Like bonds, sukuk have a maturity date and

provide income flows over the life of the security with a payment at maturity to their holders.

Unlike bonds, the value of sukuk is not based on the creditworthiness of the issuer, as holding

sukuk shares represents the ownership in tangible assets, usufruct or services of revenue-generating

issuers. As a consequence, sukuk prices can vary both with the creditworthiness of the issuer and

with the market value of the underlying asset.

Sukuk can be structured like debt-based instruments or partnership contracts. Debt-based instru-

ments such as Ijara (rental/lease agreement) and Murabaha (cost-plus sale) do not contain stricto

sensu interest, but they pay a predetermined rate of return to investors. Musharaka and Mudaraba

are partnership contracts in which the financier and the entrepreneur share profits based on pre-

agreed ratios, whereas losses are commensurate to their contribution to the partnership.

Given the expansion of sukuk, it appears as a surprise that research remains scarce on this issue.

Godlewski, Turk-Ariss, and Weill (2013) use an event study methodology to compare the stock mar-

ket reaction to the announcements of sukuk and bond issues of companies in Malaysia. They find that

the stock market reaction is neutral to the announcement of bonds but that investors react negatively

to the announcement of sukuk. The negative implications of sukuk issues are attributed to two reasons.

First, an adverse selection mechanism can be at work, as borrowers with the lowest return expecta-

tions may favour the issuance of profit-and-loss sharing sukuk structures over conventional Interest-

based bonds. Second, there is an excessive demand for sukuk coming from Islamic institutions. As a

result, it can be easier for a firm to issue and sell sukuk relative to bonds. Issuing sukuk would then be

interpreted as a way to obtain financing when the company is unable to issue a bond.

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All figures on Islamic finance activities come from Kuwait Finance House (2014).

DOI: 10.1111/twec.12509

World Econ. 2018;41:699–722. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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Godlewski, Turk-Ariss, and Weill (2016) prolong this work by examining the impact of two

key features of sukuk on the stock market reaction: the type of sukuk and the certification by

Sharia scholars. Sukuk must be certified by these scholars to guarantee their compliance with

Sharia. By performing the analysis on a sample of eight countries, they find that debt-like sukuk

favour a positive stock market relation in comparison with partnership contracts. This result is

observed in particular for Ijara sukuk, the most commonly used sukuk structure. They explain this

finding by the lower Sharia compliance risk of Ijara compared to other structures but also by the

adverse selection mechanism that hampers the issuance of profit-and-loss sharing sukuk. They also

show that the choice of scholars can influence the stock market reaction to sukuk issuance.

Our objective is to extend these works by providing a broader analysis of the impact of sukuk

issuance on the performance of the issuing firm. Godlewski et al. (2013) have analysed the stock

market reaction to sukuk issuance, but they restrict their study to the short-term stock market per-

formance. We can however wonder if issuing sukuk exerts an influence on medium-term stock

market performance and on operating performance (OP). The analysis of the medium-term stock

market reaction is of use to check whether the negative stock market reaction persists over time.

By examining OP, we have a better view of all consequences of the issuance of sukuk for a

firm. In line with the theoretical arguments on the influence of debt issuance on firm performance,

we can check whether sukuk issuance exerts a similar impact than bond issuance. The study of OP

helps also understanding the reasons of the negative stock market reaction following sukuk issu-

ance. Namely, the negative stock market reaction to sukuk issuance suggests that stock market

investors consider this event as bad news for the evolution of the firm performance. To issue sukuk

would act as a signal of the bad financial shape of the issuer, in line with the adverse selection

argument stressed before. Alternatively, it can also contribute to deteriorate the situation of the

firm if such event is more costly than the issuance of a bond.

To answer these questions, we perform for the first time a broad analysis of the impact of sukuk

issuance on firm performance. We consider a sample of 114 Malaysian listed companies that

issued 164 sukuk (47 issuers) and 604 bonds (67 issuers) from 2002 to 2010. Our focus is on

Malaysia, as this country is by far the world’s biggest country of issuance for corporate sukuk.In

addition, the volume of issued corporate bonds is substantial and allows a comparison between the

issuance of corporate sukuk and bonds. The focus on the Malaysian market also allows avoiding

the influence of tax rules between sukuk and bonds, as taxation rules for sukuk in Malaysia aim at

guaranteeing the fiscal neutrality between both types of instruments.

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Understanding how sukuk

issuance influences firm performance has major interest for the analysis of sukuk markets. It con-

tributes to explain the stock market reaction by analysing how the OP of the firm evolves after the

issuance. Namely, stock market performance is supposed to be influenced, notably, by the

expected evolution of OP. So by looking simultaneously at the stock market and the OPs, we bring

a comprehensive view of the investor perception. It also provides some perspectives on the evolu-

tion of sukuk markets, as investor valuation and influence on OP can affect the decisions of firms

to issue sukuk.

Our empirical analysis is composed of four parts. First, we analyse the stock market reaction to

sukuk and bond issuance to provide evidence on the stock market performance in the short term. It

is a first step in our analysis to check whether the result from Godlewski et al. (2013) stands for

our sample before examining how sukuk issuance influences operating performance and medium-

term stock performance. Second, we calculate abnormal OP (AOP) to study how issuance can

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See for additional information the website of Securities Commission Malaysia: http://www.sc.com.my/general-section/specia

l-incentives/islamic-capital-market/ and http://www.sc.com.my/general-section/special-incentives/bond-market/.

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