Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models

Abstract

Although sukuk has been dominating the Malaysian capital market, the motivations of the firms issuing sukuk or conventional bonds remained largely unexplored. Using the partial adjustment model, we make the initial attempt, to test a firm's target debt optimizing behavior and secondly, to find the firm specific determinants of target debt ratio using a sukuk or conventional bond issuance33Sukuk samples are split into exchange-based sukuk and partnership-based sukuk, while conventional bond samples are split into convertible bond and straight bond. dataset. Our sample consists of 120 conventional bonds and 80 sukuk issuers from 2000 to 2012. We employ two recent dynamic panel data estimators,44Standard-GMM and System-GMM. which resulted in three major findings. Firstly, our results provide stronger support for trade-off view based on a firm's optimizing behavior among sukuk and conventional bond issuers, however with different issuance motives. Secondly, issuers of partnership-based sukuk and convertible bonds closely follow the pecking order view, in which the former is chosen based on firms facing a higher information asymmetry cost. Finally, while both exchange-based sukuk and straight bond issuers align towards a particular target, only firms with higher sales growth prefer the former. Reinforced by industry insights, our findings evidence that the sukuk offers bring unique “benefits” to corporate issuers unlike those of the conventional bonds.