When and why firms issue sukuk?

Abstract

Purpose

The purpose of this paper is to analyze whether investors perceive the issuance of sukuk differently than they do in case of conventional bonds, by using event study with superior data. Then, it analyzes whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. Finally, the paper proposes a testable model explaining the investor reaction.

Design/methodology/approach

This paper uses market model event study to assess investor reaction to the issuance of sukuk. Then, linear and logistic regressions are used to test whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. To investigate the differences between sukuk issuers and bond issuers, this paper tests the difference in means of issuer characteristics. Finally, the sample is subdivided into good and bad firm prospects according to dividend/earnings ratio and book-to-market ratio. The subdivisions are used to test the proposed model explaining the investor reaction.

Findings

The study finds that a large variety of firms issues sukuk. The event study reports significant negative abnormal returns around the announcement date of sukuk issuance. The study also reveals that the earning prospect of issuer firms affect the investor reaction. Firms with lower earning prospect receive a negative reaction from the investors. Also, smaller, or financially unhealthy firms are more likely to issue sukuk. Smaller and riskier firms issue sukuk, because participation in the market is less constrained. In other words, the risk-sharing nature of sukuk might imply that the firm is not confident about the future prospect. However, if the firm has good earnings prospects, investors react to the issuance of sukuk negatively.

Research limitations/implications

Reliability and availability of data is a hurdle to test the investor reaction model. As more data become available, the models implications can be further tested.

Originality/value

This paper uses the most complete set of data to study sukuk, making it the most selection bias-free and complete study. Moreover, the proposed investor reaction model will enrich the theory.

Citation

Ahmed, H., Hassan, M.K. and Rayfield, B. (2018), "When and why firms issue sukuk?", Managerial Finance, Vol. 44 No. 6, pp. 774-786. https://doi.org/10.1108/MF-06-2017-0207