The link between corporate governance, corporate social sustainability and credit risk of Islamic bonds

Abstract

Purpose

Motivated by lack of empirical research on sukuk (Islamic bonds) defaults and factors influencing the credit risk in sukuk industry, the study investigates the impact of corporate governance (CG) practices and corporate social sustainability (CS) disclosures on default risk of Islamic bonds in an emerging market.

Design/methodology/approach

In the Malaysian context the authors use generalized method of moments (GMM) to examine the mitigating effect of CG structure and CS disclosures on distance to default (DD) of sukuk issuers.

Findings

The results show that although both CG and CS have a significant and positive relationship with distance to default, the contribution of CS to augment DD is higher. Moreover, different CG variables have a varied relationship with distance to default, while the association is positive for all three pillars of CS, videlicet economic, social and environmental sustainability.

Practical implications

The findings of the study hold important implications for issuers, subscribers and regulators in the sukuk industry.

Originality/value

Limited research investigates the relationship between CG, CS and default risk of Islamic bonds. In light of this, the study attempts to fill the theoretical void in literature by examining the relationship among the underlying variables.

Citation

Ur Rehman, A., Farid, S. and Naeem, M.A. (2023), "The link between corporate governance, corporate social sustainability and credit risk of Islamic bonds", International Journal of Emerging Markets, Vol. 18 No. 12, pp. 5990-6014. https://doi.org/10.1108/IJOEM-02-2021-0210