Identifying the determinants of Malaysian corporateSukukrating

Nur Amirah Borhan and Noryati Ahmad

International Journal of Islamic and Middle Eastern Finance and Management, 2018, vol. 11, issue 3, 432-448

Abstract: Purpose - This study aims to identify the determinants of Malaysian corporateSukukrating and attempts to find out which determinant has the most significant impact. Design/methodology/approach - The framework tries to establish a relationship between firm’s size, profitability,Sukukguarantee status and types ofSukukwithSukukrating from the perspective of Agency Theory and Information Asymmetry Theory. The data consist of 43Sukukissuances from 2006 to 2015. Multinomial Logistic Regression Model is then used to find out the significant determinants ofSukukrating. Findings - The study found that only three variables significantly impactSukukrating. The results show that a guaranteedSukuk Ijarahor a guaranteedSukuk Musyarakahthat is issued by a highly profitable firm has a higher likelihood of getting rating AAA or rating AA as compared to getting rating A. A type ofSukuk, particularlySukuk Murabahah, is the most significant variable influencingSukukrating. However, firm size is not a significant determinant ofSukukrating in the context of this study. Research limitations implications - The first limitation of the study is the relatively small sample size. Second, the study only tested four independent variables. Practical implications - Several implications are derived from the results of the study. First, new firms that are planning to issueSukukshould consistently maintain a high level of profit and consider issuing debt-basedSukukto ensure that the issuedSukukhave higher rating. To increase the likelihood of getting higher rating, they should also consider providing a third-party guarantor. As for existingSukukissuers that are in lower rating category, they should increase their profitability to be upgraded to higher rating category. Second, risk-adverse investors should invest in highly profitable, guaranteed and debt-basedSukuk, as theseSukukare likely to be in higher rating category and provide guarantee in terms of capital payments during liquidation or bankruptcy. Third, to reduce information asymmetry, policymakers should make it compulsory for allSukukissuers to have theirSukukrated annually and make it mandatory for all rating agencies in Malaysia to publish theirSukukrating methodologies. Originality/value - This paper helps to expand the limited existing literature about the determinants ofSukukrating, particularly for the Malaysian corporateSukuk.

Keywords: Agency theory; Sukuk rating; Multinomial logistic regression; Information asymmetry theory; Sukuk Murabahah (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-02-2017-0045

DOI: 10.1108/IMEFM-02-2017-0045

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