Firm‐level political risk and Shari’ah compliance: equity capital cost and payouts policy

Abstract

AbstractUsing a novel Economic Policy Uncertainty (EPU) firm‐level political risk index as a measurement for political risk corporations face, we examine the impact of firm‐level political risk on the cost of equity capital (COE) and dividend payouts policy of firms. The paper aims to shed light on adaptation implications of Shari’ah compliance (SC) on firms exposed to firm‐level political risk. We analyse if adoption of Shari’ah compliance requirements (SCR) mitigates firm‐level political risk and impacts the cost of equity and dividend policy. Our benchmark results show that a 1 percent increase in exposure to political risk contributes to a rise in the COE by 0.1 percent and in dividend payout by 5 percent. We find that SC eventually leads to a fall in the COE and in dividend payouts, despite exposure of the firm to political risk. Our findings have important policy implications that are relevant to Shari’ah‐compliant equities and beyond.