Stock Market’s Reactions Against Sukuk Issuance And Liquidity In The Muslim Countries
The stock market has shown a negative reaction in the past decade due to high volatility and low liquidity. This negative reaction can be attributed to several events, one of which was increased sukuk announcement. Empirical studies have shown that sukuk announcement leads to a negative stock market...
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| Summary: | The stock market has shown a negative reaction in the past decade due to high volatility and low liquidity. This negative reaction can be attributed to several events, one of which was increased sukuk announcement. Empirical studies have shown that sukuk announcement leads to a negative stock market reaction. Investigating the stock market reaction towards sukuk announcement can mitigate such a negative reaction. The thesis examines three complementary issues surrounding the impact of Sukuk on the stock market in selected countries: Sukuk announcement, Sukuk yield spread, and Sukuk liquidity. The first objective examines the stock market reaction towards the announcement of corporate Sukuk issuance. The sample includes 157 corporate Sukuk announcements from Southeast Asian and GCC countries from January 2001 to September 2016. Event study is employed to test the stock market reaction towards Sukuk announcement. Then, independent samples t-test and one-way ANOVA are used to see whether stock market reaction towards Sukuk announcement differs between regions and the selected countries. Finally, multiple linear regression is used to investigate the determinants of abnormal returns. The results show a significant negative abnormal return to Sukuk announcements over several event windows, specifically within 12 days from the actual issuance day. This finding is a novel contribution to the literature. There is also a significant difference in terms of stock market reaction between Southeast Asia and the GCC. The second objective investigates the co-movement of yield spreads and stock market volatility of new and seasoned corporate Sukuk issuance. The sample comprises 3276 daily observations of yield spreads and stock market volatility of 135 Sukuk issuance from 14 listed companies in Malaysia and Indonesia. The sample period is June 2014 to December 2016. Levene's test and autoregressive tests are used to test the hypotheses. The results show that there is a significant difference in yield spreads between new and seasoned Sukuk in both Malaysian and Indonesian markets. In addition, new and seasoned Sukuk yield spreads are negatively associated with stock market volatility. The third objective examines the effect of corporate Sukuk liquidity on stock market liquidity. The sample consists of 108 observations of Sukuk in Malaysia from January 2008 to December 2016. Independent samples t-test and ordinary least squares are used to investigate whether there is any relationship between Sukuk liquidity and stock market liquidity. The results indicate that two measures of Sukuk liquidity have a significant and positive impact on stock market liquidity. Furthermore, a higher Sukuk grade has a higher impact on stock market liquidity compared to a lower Sukuk grade This study contributes to the literature by extending the application of trade-off theory in explaining the stock market reaction towards Sukuk announcement in the short run. This theory predicts positive stock market reaction in the long run, but this study evinces that there is a negative reaction in the short run. In the second part, the study shows that new (seasoned) Sukuk has a lower (higher) risk, but it has a higher (lower) correlation with stock market volatility. Therefore, fixed income fund managers are suggested to switch to new Sukuk to manage portfolio volatility. The final part of the study contributes to the theory on asset liquidity, specifically the liquidity of Sukuk as a financial asset, using latent liquidity. Sukuk liquidity is an important determinant of stock market liquidity; a higher (lower) Sukuk grade has a higher (lower) impact on stock market liquidity. The author suggests that policymakers avoid making several sukuk announcements within the same period and instead schedule the Sukuk announcements after a 12-day grace period. The scope of this study is limited to viii corporate Sukuk. Government Sukuk is excluded because it is free of risks, given that it is regulated by the central bank. Future studies could extend the scope to cover both corporate and sovereign Sukuk. |
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