Shari’ah-compliant Sukuk versus conventional bond announcements: is there a wealth effect?

Abstract

We employ standard event study methodology to examine the stock price reaction to the issuance announcements of 237 Islamic bonds (Sukuk) versus 231 conventional bonds issued in twelve financial markets from 2005 to 2017. We further examine the effects of issuance announcement on shareholder wealth in multiple economic settings, pre-crisis, during the crisis, and post-crisis, using the recent financial crisis (2007–2009) as a benchmark. Using multiple regression model, we also attempt to identify the potential explanatory variables for the wealth effects. Our findings support existing literature: there is an insignificant market reaction for the announcements of Sukuk as well as conventional bonds in the pre-global financial crisis period of 2008. During the crisis period, market reaction is significantly negative for both groups. In the post-crisis period (which is the longest period and the largest sub-sample), the market reaction for Sukuk is positive and significant, apparently due to market participants’ new look, awareness and increased demand for Islamic financial products, whereas for conventional bonds the market reaction is insignificant. Additionally, our study finds supporting results for the signalling theory and the asymmetric information theory. Offer size has a significant positive impact on stock returns. In the pre-crisis period, large firms (with a higher asset base) generated abnormal returns. For the periods during and post crisis, large Sukuk issuers had higher abnormal returns. In addition, significant leverage is found for issuing bonds in post and during crisis periods.