Performance of shariah-compliant firms and non-shariah-compliant firms in the MENA region

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.