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Are Islamic Investment Certificates Special? Evidence on the Post-Announcement Performance of Sukuk Issues

Are Islamic Investment Certificates Special? Evidence on the Post-Announcement Performance of Sukuk Issues
Christophe J. Godlewski, University of Strasbourg, LaRGE Research Center; EM Strasbourg Business School
Rima Turk Ariss, Lebanese American University
Laurent Weill, Université Robert Schuman Strasbourg III; University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)
April 2010

Abstract: "The last decade has witnessed rapid expansion of Islamic financial instruments, notably with the proliferation of Islamic investment certificates called Sukuk. Sukuk generally represent the Islamic financial instrument equivalent to conventional bonds. We evaluate the economic differences between these financing techniques and appraise the implications on the future expansion of Sukuk. We use a market-based approach to investigate whether investors react differently to the announcements of issues of Sukuk and conventional bonds. We find that the stock market is neutral to the announcement of conventional bonds, but we observe a significant negative stock market reaction to the announcement of Sukuk. We explain this different stock market reaction using the adverse selection mechanism, which favors Sukuk issuance by lower-quality debtor companies. Unlike arguments presented in prior literature, our results support the view that differences exist between Sukuk and conventional bonds because the market is able to distinguish among these securities."

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