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Do markets perceive sukuk and conventional bonds as different financing instruments?

Christophe Godlewski (), Turk-Ariss, Rima and Laurent Weill ()
Authors registered in the RePEc Author Service: Rima Turk Ariss

No 6/2011, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

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.

Date: 2011-05-05
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Published in Published in Journal of Comparative Economics, Volume 41, Issue 3, Pages 745-761, August 2013

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