The impact of Islamic Debt on firm performance
Fitriya. (2013). The impact of Islamic Debt on firm performance (Thesis, Doctor of Philosophy (PhD)). University of Waikato, Hamilton, New Zealand. Retrieved from http://hdl.handle.net/10289/7675
Permanent Research Commons link: http://hdl.handle.net/10289/7675
This thesis uses micro-econometric analysis to examine the impact of Islamic debt on firm value and firm financial performance by observing two groups, namely Malaysian firms and Indonesian firms. The study in particular considers (i) the impact of Islamic debt on firm value and firm financial performance, (ii) the Islamic debt announcement effect on stock return, (iii) the relationship between Islamic debt characteristics and stock return. A number of significant contributions to corporate finance arise from this research in relation to Islamic debt instruments and firm financial performance. First, it provides evidence of the Islamic debt impact on firm value and firm financial performance. Second, it provides evidence of the Islamic debt announcement effect on stock returns. Third, it provides evidence of the Islamic debt characteristics’ impact on stock return. Fourth, and very importantly it provides new insights, adding substantially to the very few studies that have been conducted on these types of instruments. It is expected that the empirical results from this study will be a starting point for significant future research on similar instruments. Islamic debt became increasingly popular for the last decade as companies sought to raise funds by offering corporate Islamic debt (sukuk). It has become significant for raising funds in the international capital markets through Islamic law (shariah). Moreover, Islamic debt has become a topic of research interest in Islamic finance since the financial crisis which affected major countries and firms around the world. The rise of Islamic debt, initially in Asia (Malaysia) is due to the fact that (i) Malaysian firms want to tap into investors from the Middle East (oil money), who have a considerable amount of money to invest, but also have to adhere to their religious view, (ii) the government’s policy regarding the Islamic Capital Market establishment along with its instruments, (iii) Islamic debt appears to offer more security and therefore has become an attractive market both for Muslim and non-Muslim investors. This is reflected by the increase in the issue size from year to year, for both sukuk issuers and sukuk holders, receiving increased support in the form of market surveillance and regulation, and from market participants. Data employed in this study are obtained from the Islamic Finance Information Service (IFIS) database. The sampling period is 2000 to 2009, which is ten years and quarterly observations are used. These quarterly data are important since the issuance of Islamic debt for every firm is in different quarters with 227 companies from Malaysia issuing Islamic debt from 2000 to 2009. From those 227 Malaysian companies, 106 companies were public companies, and 121 companies were private companies. Of the 106 public companies, 31 are excluded from the data list due to the non-availability of their respective financial statement data. In addition, the sample of Islamic debt offering must have data availability on the size of the offering, the maturity length, the history of the issuance, and other accounting data information. There were 26 Indonesian firms that issued Islamic debt for the range of this study period, however only 14 firms had complete data. A balanced panel of 80 Malaysian and 14 Indonesian companies are employed in this study. For panel data analysis, the availability of ten years’ worth of data is required, particularly quarterly data. For an event study and multivariate regression method analysis, the data of the daily closing stock prices for two years prior and one year after the announcement date are required in order to calculate the abnormal return using the abnormal return benchmark (mean adjusted return, market adjusted return and market model return). The choice of model employed is specified according to its diagnostic testing results for non-normality, heteroskedasticity, multicollinearity, endogeneity and linearity in both Malaysia and Indonesia. A test is conducted to confirm that there are no outliers in the data set prior to the diagnostic testing. Poolability and co-integration testing are also included. Based on the diagnostic results, Malaysian data are analysed using the dynamic panel generalised method of moment and Indonesian data are analysed using the panel corrected standard error. These two methods are employed to investigate the impact of Islamic debt issues on firm value and/or firm financial performance. Next, the analysis examines the impact of Islamic debt announcement on abnormal return using an event study method. The abnormal return benchmarks used are mean adjusted return, market adjusted return and market model return. Finally, the relationship between the Islamic debt characteristic and stock return is analysed using the generalised least square and the ordinary least square for Malaysian and Indonesian data respectively. The findings for the impact of Islamic debt on firm value and/or firm financial performance using Malaysian and Indonesian data reveal that when Islamic debt was first introduced to the market; it affected higher firm performance as indicated by market-based and accounting-based measures. However, the issuance of Islamic debt for a second time lowers firm performance which suggests that Islamic debt expansion has a detrimental effect on firm value. The Islamic debt issuance for more than two issues improves a firm’s financial performance, indicating that after having a few experiences in issuing Islamic debt, the issuance of Islamic debt impacts positively on firm performance. This may be attributed to the holders of Islamic debt closely monitoring the management of the firm to ensure that the firm can generate profits and distribute a periodic stream of cash flow over time. Thus, Islamic debt also reduces the agency problem within the company and hence increases firm value. From the view point of markets, this may indicate that the markets learn through several issuances of Islamic debt and therefore have greater confidence in subsequent issuances compared to the second issuance of Islamic debt. The second observation is that when Islamic debt proportion is below the average or at the average, it has a positive significant impact on firm value and/or firm financial performance. However, the greater the proportion of Islamic debt issued, the lower the firm performance. This result is similar to the empirical result for non-Islamic debt, in that the proportion of debt at a certain level may hamper firm performance as an additional incurrence of debt gives no guarantee that firm performance will be higher. This is mainly because as the leverage increases, so does the risk of default, which provides a greater incentive for lenders to monitor the firm. Moreover, the proportion of Islamic debt at the average represents the best likelihood of affecting higher firm value and/or firm financial performance. The third observation is that debt-types and equity-types affect firm performance, while asset-types have a positive but not significant effect. The result supports the notion that certain types of debts have a different impact on shareholders’ wealth. Overall, the findings, both for Malaysia and Indonesia, indicate that Islamic debt has a positive impact of on firm value and/or firm financial performance. The positive findings are consistent with theory covered in prior research and showing that this theory can also be applied to Islamic debt. Moreover, Islamic debt makes a greater contribution to the improvement of firm financial performance than non-Islamic debt. The findings for the event study analysis, using three benchmarks, reveal that there is a negative and significant impact for both average abnormal returns (AAR) and cumulative average abnormal returns (CAAR) for Malaysia. This negative finding supports the negative impact hypothesis. Overall, the result for one day prior to and one day after the announcement is positive and significant. In contrast to the findings for Malaysia, the impact of Islamic debt announcement, using three benchmarks, is positive and significant both for AAR and CAAR for Indonesia. This positive finding supports the positive impact hypothesis. Overall, the result for one day prior to and one day after the announcement is positive and significant. Moreover, the impact of the announcement for the event window spanning 31 days (-15 to +15) is varied for the three benchmark returns used in this study. The results for this window span reveal that the majority of AAR and CAAR are negative and significant. Furthermore, the results for AAR and CAAR for Malaysia are almost similar to the results found for Indonesia. The unit root test result for Malaysia indicates that the market is efficient in the context of weak form efficiency, which suggests that the price movements are unpredictable. In contrast to Malaysia, the unit root test result for Indonesia indicates that the market is inefficient in the context of weak form efficiency, which suggests that the price movements are predictable. The findings for Islamic debt characteristics’ impact on stock return reveal that the Islamic debt characteristics, which are debt to equity ratio and firm size, have a positive and significant impact on shareholder wealth, while Islamic debt offering size and maturity have no significant impact on shareholders’ wealth for Malaysia. For Indonesia, the result is similar to the result obtained for Malaysia except for debt equity ratio and firm size which have positive and significant impacts. With regards to the frequency and types of Islamic debt issued, only the first issuance of Islamic debt and Islamic debt-types have a positive and significant impact on shareholders’ wealth for Malaysia and Indonesia, with exception that there is no debt-type for Indonesia. In terms of the firm value and/or firm financial performance; higher firm value or firm financial performance of firms issuing Islamic debt has a positive and significant impact on shareholders’ wealth for Malaysia and Indonesia. This study makes substantive contributions to the financial understanding of Islamic debt instruments. The analysis is novel in that it breaks away from the typically religious discussion of instruments and the very detailed prescriptive approach. It provides a considered and carefully crafted micro-econometric analysis of market data built upon detailed diagnostic testing and robust model building. This study points the way for future Islamic capital market-based analysis.
University of Waikato
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