Shariah-compliance and value of analysts' recommendations: evidence from the MENA region

Omar Farooq

Journal of Islamic Accounting and Business Research, 2014, vol. 5, issue 1, 61-76

Abstract: Purpose - – The purpose of this paper is to document the performance of analysts' recommendations for shariah-compliant firms and non-shariah-compliant firms in the MENA region during the period between 2005 and 2009. Design/methodology/approach - – This paper uses post-recommendation market-adjusted returns as a measure of performance and computes returns for different holding periods. Significant positive (negative) returns following buy (sell) recommendation will indicate value relevance of these recommendations. Findings - – The results show that analysts are not able to make any value relevant recommendations for shariah-compliant firms. The author documents insignificant returns following analysts' buy and sell recommendations for shariah-compliant firms. In contrast to their performance for shariah-compliant firms, the results show that analysts are able to produce value relevant recommendations for non-shariah-complaint firms. The author reports significant returns following analysts' buy recommendations for non-shariah-complaint firms. The author also reports significantly positive spread between returns following analysts' buy and sell recommendations for non-shariah-compliant firms. Positive spread indicates that analysts are able to differentiate between well-performing and badly-performing non-shariah-compliant firms. Interestingly, in case of sell recommendations, the results show no significant value in analysts' sell recommendations for non-shariah-complaint firms. Practical implications - – The results imply that investors should not blindly follow analyst recommendations for shariah-compliant firms while making their investment decisions in the MENA region. Originality/value - – This paper makes detailed analysis of analyst recommendations for shariah-compliant firms and non-shariah-compliant firms in previously unexplored MENA region.

Keywords: Emerging markets; Islamic finance; Performance of analyst recommendations; Shariah-compliance (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jiabrp:jiabr-04-2013-0010

DOI: 10.1108/JIABR-04-2013-0010

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