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Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?

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  • Ashraf, Dawood
  • Felixson, Karl
  • Khawaja, Mohsin
  • Hussain, Syed Mujahid

Abstract

The Islamic equity screening standards specifically forbid investment in equities of companies with high financial leverage and a low fraction of investment in real assets. We investigate how these constraints on financial leverage and higher investment in real assets (operating leverage) affect the performance of Islamic equity portfolios (IEPs). The empirical findings suggest that investors sacrifice potential returns by holding constrained portfolios but also avoid some of the risk. The exact effect on portfolio performance is largely dependent of the actual screening standard used, either book-value based (MSCI) or market-value based (AAOIFI). These results have clear implications for both investors and policy makers.

Suggested Citation

  • Ashraf, Dawood & Felixson, Karl & Khawaja, Mohsin & Hussain, Syed Mujahid, 2017. "Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 171-182.
    • Handle: RePEc:eee:pacfin:v:42:y:2017:i:c:p:171-182
    DOI: 10.1016/j.pacfin.2017.02.009
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    5. Hasanudin Hasanudin & Andini Nurwulandari & I. Made Adnyana & Novi Loviana, 2020. "The Effect of Ownership and Financial Performance on Firm Value of Oil and Gas Mining Companies in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 10(5), pages 103-109.
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    7. Md Safiullah & Abul Shamsuddin, 2021. "Asset pricing factors in Islamic equity returns," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 523-554, June.
    8. Cheong, Calvin W.H., 2021. "Risk, resilience, and Shariah-compliance," Research in International Business and Finance, Elsevier, vol. 55(C).
    9. Azmi, Wajahat & Mohamad, Shamsher & Shah, Mohamed Eskandar, 2020. "Ethical investments and financial performance: An international evidence," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
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    11. Kahf, Monzer & Al-Hajjaji, Eman Mohammed, 2019. "Analysis of Sharī‘ah Based Equity Screenings: Developing a Sharī‘ah-Compliant Index for Qatar Stock Exchange," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 26, pages 1-41.
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