Shariah compliance and information transmission: evidence from an emerging market

Abstract

Purpose This paper aims to document the information transmission capacity of Shariah-compliant firms. Design/methodology/approach The vector auto-regression (VAR) model is used to test the information transmission capacity of Shariah-compliant firms in India during the period between 2010 and 2015. Findings The findings show that the returns of non-Shariah-compliant firms lead the returns of Shariah-compliant firms. It is argued that non-Shariah-compliant firms possess certain financial characteristics (higher leverage, higher accounts receivable and higher cash holdings) that make their information environment better than information environment of Shariah-compliant firms. The authors argue that superior information environment leads to timely incorporation of market-wide information, thereby causing the returns of non-Shariah-compliant firms to lead the returns of Shariah-compliant firms. It is also shown that the result holds in various market conditions. Originality/value It is believed that prior literature does not adequately address the information transmission capacity of the stock prices of Shariah-compliant firms. The gap is filled by documenting that stock prices of Shariah-compliant firms that are more informative than stock prices of non-Shariah-compliant firms.