Asymmetric information and securitization design in Islamic capital markets

Zairihan Abdul Halim, Janice How, Peter Verhoeven and M. Kabir Hassan

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: Motivated by religious prescriptions and severe informational problems in the corporate sukuk market, we investigate how capital market imperfections influence sukuk securitization design, focusing on tranching and subordination practices. Employing negative binomial regressions and a 2SLS regression framework for a sample of 335 corporate sukuk offerings in Malaysia between 2001 and 2014, we find Islamic finance principles matter to sukuk securitization design. For private firms, lease-based sukuk have less tranching, consistent with the significance of collateral value resilience (asset tangibility) in reducing investment risk. Contrary to expectations, equity-based sukuk have fewer tranches and lower levels of subordination – findings which we attribute to the principal and profit guarantee under this structure. We also find support for the stylized view that securitization stems from asymmetric information and market segmentation arguments. An implication of our research is that investors should pay attention to how sukuk structure, information asymmetry, and credit risk impact subordination to avoid deals with poor credit enhancement.

Keywords: Tranching; Securitization; Subordination; Sukuk; Adverse selection; Asymmetric information; Market segmentation (search for similar items in EconPapers)
JEL-codes: G11 G20 G32 O16 Z12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x1930006x

DOI: 10.1016/j.pacfin.2019.101189

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