The Role of Ownership and Governance Mechanism in Sukuk Financing by Malaysian Firms: An Application of A Double Selection Model

After controlling for the double selection bias in a sequential three-equation model of the decisions to issuance, to choose a Sukuk structure, and the volume of Sukuk engagements, we find robust evidence suggesting that ownership structure and governance mechanisms play a significant role in controlling agency costs through issuance of Sukuk. In line with monitoring hypothesis, we find that higher government ownership positively influences the decisions to participate, issue a debt-like Sukuk and volume thereof. Similarly, in line with complementarity hypothesis, the empirical evidence suggests that firms with higher board of directors’ independence are more likely to participate in issuing Sukuk with higher volumes. We also find that ethnicity, in the form of a higher proportion of Malay/Muslim members on the board of directors, does not influence the initial decision on whether or not to issue Sukuk. However, once the decision to issue Sukuk is made, firms with higher institutional ownership or a higher proportion of Malay/Muslim board members are more likely to issue equity-like Sukuk