Performance of shariah-compliant firms and non-shariah-compliant firms in the MENA region: Which is better?
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 5 September 2016
Abstract
Purpose
This paper aims to document the relative performance of non-financial shariah-compliant firms and non-financial non-shariah-compliant firms in the MENA (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain) region during the period between 2005 and 2009.
Design/methodology/approach
This paper uses pooled ordinary least squares regression analysis to document the effect of shariah compliance on stock price performance in the MENA region on a sample of non-financial firms that consists of shariah- and non-shariah-compliant firms.
Findings
Using market-adjusted returns as a proxy for performance, this paper shows that shariah-compliant firms underperform non-shariah-compliant firms. The results also show that underperformance of shariah-compliant firms holds in the civil law and in the common law countries. Interestingly, this paper also shows that difference between the performance of shariah-and non-shariah-compliant firms disappears during the crisis period.
Research limitations/implications
This paper argues that the characteristics of shariah-compliant firms are such that these firms are at a disadvantage relative to their non-shariah-compliant counterparts. For example, high leverage of their counterpart firms can act as a disciplining mechanism and positively affect performance of these firms. Similarly, high account receivables and high cash allow non-shariah-compliant firms to make more effective business networks than shariah-compliant firms and fund large capital expenditures. Consequently, shariah-compliant firms underperform non-shariah-compliant firms. This study’s results, however, should be read with caution, as they are mainly based upon the performance of large volume, statistical significance, sampling errors and possible labeling miss-specification. Further research on this topic with different research methodology is essential.
Originality/value
This paper takes a financial view rather than religious view while highlighting the impact of shariah characteristics on firm performance.
Keywords
Citation
Farooq, O. and Alahkam, A. (2016), "Performance of shariah-compliant firms and non-shariah-compliant firms in the MENA region: Which is better?", Journal of Islamic Accounting and Business Research, Vol. 7 No. 4, pp. 268-281. https://doi.org/10.1108/JIABR-10-2013-0039
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited