Shariah-compliant investments and stock returns: evidence from the Indonesian stock market

Purpose - The purpose of this paper is to investigate the impact of the IndonesiaShariah-compliant Stock Index (ISSI) on the performance of included shares. In essence, the authors ask whether the establishment of the ISSI provides abnormal returns for the firms that are not included in the Jakarta Index. Design/methodology/approach - The authors use an event study methodology to estimate cumulative abnormal returns in the days surrounding the event to examine the relationship betweenShariah-compliant investments and stock returns. The estimation window of 90 trading days prior to the event (−30) to day 60 after (+60) is adopted. They also use a range of investment performance measures to provide new evidence on whether faith-based ethical investments generate superior performance compared to their unscreened benchmarks. Findings - Using daily returns, the Indonesia ISSI and panel data model, the findings show that the inclusion of the ISSI has a positive impact on the financial performance of the included shares during the 41-day event window. The evidence also suggests that the ethical investment has a significant influence on the performance of stock market returns. Research limitations/implications - This study offers insights to policymakers, investors and fund managers interested in the indices’ performance. A key conclusion that could be derived by bodies that regulate Islamic products and services is that investors are not only concerned about what is profitable but also what makes their investments ethical. Originality/value - Although the global growth of the Islamic capital market products and services has been tremendous in recent years, very few studies focus on the Indonesian market and indeed, none of them devote sufficient attention toShariah-compliant investments and stock returns.