Cost of sharia-compliancy in stock returns - evidence from Malaysia

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School of Business | Master's thesis
Ask about the availability of the thesis by sending email to the Aalto University Learning Centre oppimiskeskus@aalto.fi

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Date

2016

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Finance

Language

en

Pages

44

Series

Abstract

Purpose of the study The purpose of this study is to analyze whether risk-adjusted returns from sharia-compliant stocks have differed from conventional (i.e. sharia non-compliant) stocks in Malaysia 2007-2016. The study context is Islamic finance which comprises financial institutions and assets managed in an ethical framework compliant to sharia, the Islamic law. Islamic finance has been developing rapidly also in Europe and as such makes an interesting study subject from a Western point-of-view. In addition, as Islamic finance has attracted lower academic interest compared to conventional finance in the past, this study aims to help fill the research gap. As sharia prohibits certain financial and commercial activities from companies, the research question and the contribution of this study is to analyze whether sharia adhering investors are worse off in terms of abnormal returns compared to investors who don’t screen stocks based on a religious framework. Data and methodology The main data sample comprises reports published bi-annually by the Sharia Advisory Council (SAC) of Securities Commission Malaysia (SC) which provide a listing all sharia-compliant securities on the Bursa Malaysia, the main Malaysian stock exchange. Using the sharia-compliancy data from these reports and combining that data with financial metrics extracted from Datastream for the period of 5/2007 to 5/2016, the final dataset comprises a panel of approx. 890 stocks. The applied analysis approach is two-fold: First the data is analyzed using a panel data random effects regression which includes a binary variable for sharia-compliancy. The second approach groups the stocks into two portfolios (Halal, comprising of sharia-compliant stock and Haram, comprising of sharia non-compliant stocks). The analysis itself applies a regression on the return difference between these two portfolios in order to capture potential alpha. Results The results of the analysis suggest that sharia-compliancy is not a statistically significant risk determinant for stock returns. From a practical point-of-view, this would mean that investors aren’t penalized for their sharia adherence.

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Thesis advisor

Nyberg, Peter

Keywords

Islamic finance, stock returns, Sharia, Malaysia

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Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-201702142313

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[gradu] Kauppakorkeakoulu / BIZ