The Effect of Shari’ah Compliance Announcements on Stock Returns in Malaysia

Abstract

There are increasing demands and interests in Shari’ah compliant stocks in Malaysia. The identification of Shari’ah compliant stocks is known as Shari’ah screening, which is announced to the public twice a year. Hence, the objective of this study is to investigate whether the announcements provide valuable information and the impact of such announcements on stock returns. This study applies market model to estimate the stock returns. Alternative hypotheses that are being tested are the inclusion (removal) of stocks in (from) the Shari’ah Compliant List give a significant effect on the stock Cumulative Average Abnormal Return (CAAR). Employing the event study methodology in years 2007 –2015, this study provides unambiguous evidence that the inclusion of a stock in the Shari’ah Compliant List has increased the price that lead positive stocks returns 1 day within the announcement date. Meanwhile, the removal from the list results a negative stock returns due to the declined of the stock price. As such, the announcements of Shari’ah Compliant List do carry informational value and have significant effect on the stock returns in Malaysian capital market. Shari’ah compliance announcement is significant especially to the Muslim investors to assist them avoiding prohibited investment activities. The present study has significantly contributed to the Malaysian Efficient Market Hypothesis as well as to the practical implication for the companies in avoiding with haram activities.