Shariah-compliance and value of analysts' recommendations: evidence from the MENA region

Abstract

Purpose

The purpose of this paper is to document the performance of analysts' recommendations for shariah-compliant firms and non-shariah-compliant firms in the MENA region during the period between 2005 and 2009.

Design/methodology/approach

This paper uses post-recommendation market-adjusted returns as a measure of performance and computes returns for different holding periods. Significant positive (negative) returns following buy (sell) recommendation will indicate value relevance of these recommendations.

Findings

The results show that analysts are not able to make any value relevant recommendations for shariah-compliant firms. The author documents insignificant returns following analysts' buy and sell recommendations for shariah-compliant firms. In contrast to their performance for shariah-compliant firms, the results show that analysts are able to produce value relevant recommendations for non-shariah-complaint firms. The author reports significant returns following analysts' buy recommendations for non-shariah-complaint firms. The author also reports significantly positive spread between returns following analysts' buy and sell recommendations for non-shariah-compliant firms. Positive spread indicates that analysts are able to differentiate between well-performing and badly-performing non-shariah-compliant firms. Interestingly, in case of sell recommendations, the results show no significant value in analysts' sell recommendations for non-shariah-complaint firms.

Practical implications

The results imply that investors should not blindly follow analyst recommendations for shariah-compliant firms while making their investment decisions in the MENA region.

Originality/value

This paper makes detailed analysis of analyst recommendations for shariah-compliant firms and non-shariah-compliant firms in previously unexplored MENA region.

Citation

Farooq, O. (2014), "Shariah-compliance and value of analysts' recommendations: evidence from the MENA region", Journal of Islamic Accounting and Business Research, Vol. 5 No. 1, pp. 61-76. https://doi.org/10.1108/JIABR-04-2013-0010