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Institute for Economies in Transition, Bank of Finland BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland

No 6/2011:
Do markets perceive sukuk and conventional bonds as different financing instruments?

Christophe J. Godlewski (), Rima Turk-Ariss and Laurent Weill

Abstract: 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.

Keywords: financial instruments; Islamic finance; sukuk; event studies; (follow links to similar papers)

JEL-Codes: G14; P51; (follow links to similar papers)

37 pages, May 6, 2011

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