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

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Title: Do markets perceive sukuk and conventional bonds as different financing instruments?
Author: Godlewski, Christophe J. ; Turk-Ariss, Rima ; Weill, Laurent
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 6/2011
Year of publication: 2011
Publication date: 5.5.2011
Published in: Published in Journal of Comparative Economics, Volume 41, Issue 3, Pages 745-761, August 2013
DOI: 10.1016/j.jce.2013.02.006
Pages: 37 s.
Keywords: joukkovelkakirjat; rahoitus; islam; arvopaperit; osakemarkkinat; Malesia; yritykset; Bofit-kokoelma; sukuk-velkakirjat
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.

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