Shariah compliance and information transmission: evidence from an emerging market

Purpose - This paper aims to document the information transmission capacity ofShariah-compliant firms. Design/methodology/approach - The vector auto-regression (VAR) model is used to test the information transmission capacity ofShariah-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 ofShariah-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 ofShariah-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 ofShariah-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 ofShariah-compliant firms. The gap is filled by documenting that stock prices ofShariah-compliant firms that are more informative than stock prices of non-Shariah-compliant firms.