How informative are stock prices of Islamic Banks?

Abstract

Using a sample of 2,210 observations for 170 banks operating in 12 countries with dual banking systems over 2005–2017 period, we find that Islamic banks have a lower stock return non-synchronicity and a lower illiquidity ratio. In addition, their current stock returns have less predictive power for future earnings than the returns of conventional banks. The results hold for the GCC-member countries and in the non-crisis period. Hence, Islamic banks in such countries have less information content in stock prices than conventional banks, which can be due to their lower degree of transparency mandated by their complex financial paradigm. This suggests that for Islamic banks, market discipline may not be as effective as it is for conventional banks and hence they require more direct supervision. The finding has important implications for policymakers in countries with dual banking systems.