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Do markets perceive sukuk and conventional bonds as different financing instruments?

Listed author(s):
  • Godlewski, Christophe J.
  • Turk-Ariss, Rima
  • Weill, Laurent

The last decade witnessed a proliferation in issues of sukuk, Islamic financial instruments structured to replicate the cash flows of conventional bonds. Using a market-based approach on Malaysian data, we consider whether investors react differently to the announcements of sukuk and conventional bond issues. Our findings suggest the stock market is neutral to announcements of conventional bond issues, but reacts negatively to announcements of sukuk issues. We attribute this finding to the excess demand for Islamic investment certificates and explain the difference in stock market reactions as an adverse selection mechanism that favors sukuk issuance by lower-quality debtor companies. Unlike previous studies, our findings indicate markets readily distinguish between sukuk and conventional bonds.

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File URL: https://helda.helsinki.fi/bof/bitstream/123456789/8315/1/168527.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 6/2011.

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Date of creation: 05 May 2011
Publication status: Published in Published in Journal of Comparative Economics, Volume 41, Issue 3, Pages 745-761, August 2013
Handle: RePEc:bof:bofitp:2011_006
Contact details of provider: Postal:
Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland

Phone: + 358 9 183 2268
Fax: + 358 9 183 2294
Web page: http://www.bofit.fi/en/
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  1. Rodney Wilson, 2008. "Innovation in the structuring of Islamicsukuk securities," Humanomics: The International Journal of Systems and Ethics, Emerald Group Publishing, vol. 24(3), pages 170-181, August.
  2. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
  3. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
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