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Asymmetric information and securitization design in Islamic capital markets

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  • Abdul Halim, Zairihan
  • How, Janice
  • Verhoeven, Peter
  • Hassan, M. Kabir

Abstract

Motivated by religious prescriptions and severe informational problems in the corporate sukuk market, we investigate how capital market imperfections influence sukuk securitization design, focusing on tranching and subordination practices. Employing negative binomial regressions and a 2SLS regression framework for a sample of 335 corporate sukuk offerings in Malaysia between 2001 and 2014, we find Islamic finance principles matter to sukuk securitization design. For private firms, lease-based sukuk have less tranching, consistent with the significance of collateral value resilience (asset tangibility) in reducing investment risk. Contrary to expectations, equity-based sukuk have fewer tranches and lower levels of subordination – findings which we attribute to the principal and profit guarantee under this structure. We also find support for the stylized view that securitization stems from asymmetric information and market segmentation arguments. An implication of our research is that investors should pay attention to how sukuk structure, information asymmetry, and credit risk impact subordination to avoid deals with poor credit enhancement.

Suggested Citation

  • Abdul Halim, Zairihan & How, Janice & Verhoeven, Peter & Hassan, M. Kabir, 2020. "Asymmetric information and securitization design in Islamic capital markets," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x1930006x
    DOI: 10.1016/j.pacfin.2019.101189
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    More about this item

    Keywords

    Tranching; Securitization; Subordination; Sukuk; Adverse selection; Asymmetric information; Market segmentation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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