Purpose This paper aims to investigate the dynamic portfolio optimisation performance of numerous samples of Shariah-compliant firms in the USA vis-à-vis the overall conventional sample. Design/methodology/approach This paper constructs efficient frontiers and subsequently the capital market line using the ovport set of commands in STATA. From the capital market line, the tangent portfolio is found, and the Sharpe ratio of the tangent portfolio is the primary measurement of the dynamic portfolio optimisation performance of the samples of Shariah-compliant samples in this study. Findings This paper finds that the overall conventional sample will outperform the Shariah-compliant samples in most cases. However, there exists a consistent trend whereby the performance of the overall conventional sample will converge towards the performance of the Shariah-compliant samples (and even be lower at times), as the market approaches a looming crisis suggesting that the Shariah-compliant samples do not experience significant deteriorations in their performance as compared to the conventional sample and that they provide stability during such times. Research limitations/implications This paper assumes no transaction costs, illiquidity, bid-ask spread and non-compliant revenue purification all of which may negatively affect portfolio performance. Practical implications The findings of this paper suggest that Shariah-compliant samples should be included in portfolios during times of crisis because they are less affected by market-wide volatility. Social implications The stability of Shariah-compliant samples reflects the conservativity of the contemporary Shariah stock screening methodologies and the Shariah itself. Originality/value Portfolio optimisation studies on Shariah-compliant samples are usually static in nature and are conducted in selected Muslim countries. This paper studies the dynamic portfolio optimisation in the USA where a liquid Islamic capital market is non-existent.

Shariah compliant firms operating in an environment with little to no access to a robust Islamic capital market (such as in the United States (US) stock market) will exhibit a consistent bias towards certain corporate financial behaviour. Does this bias subsequently lead to a skewed asset pricing behaviour? To answer this question, this paper investigates the asset pricing behaviour of multiple samples of Shariah compliant firms listed in the US as compared to an overall conventional sample by employing the Fama & French Five-Factor Model. By applying contemporary Shariah stock screening methodology on a sample of all stocks listed in the NYSE, NASDAQ and the IEX from January 2000 to December 2019, this paper shows that asset pricing behaviour differs not only between Shariah compliant and conventional samples, but also amongst Shariah compliant samples themselves. Ultimately, this paper shows that when deriving the appropriate expected return for Shariah compliant portfolios in the US, there are evidence to suggest that the Fama & French Five-Factor model is more suitable compared to the traditional Capital Asset Pricing Model (CAPM) since the additional risk premiums show consistent significance across groups of Shariah compliant firms.

Purpose The paper aims to construct a theoretical framework to investigate whether the Shariah debt ratio screening in contemporary Shariah stock screening methodologies results in a bias towards a certain set of corporate financial behaviour for Shariah-compliant firms in the USA where access to a liquid Islamic debt market is non-existent. Design/methodology/approach The paper extends the earnings valuation approach of Modigliani and Miller (1963) to theoretically asses the impacts of the 33% conventional debt limit on Shariah-compliant firms’ corporate financial behaviour. Then, supporting evidence is shown via empirical stylised facts of samples of Shariah-compliant firms in the USA. Findings A theoretical floor limit to investment cut-off rates is found for US Shariah-compliant firms so that lesser projects pass their internal rate of return versus conventional firms. Subsequently, such firms consistently show the following corporate financial characteristics: above-average size, larger marginal change in size and profitability in response to a given marginal change in investments, low book-to-market ratio and lower investment rates. Research limitations/implications The findings of this paper may not hold where access to a liquid Islamic capital market is present. Practical implications Caveat emptor. These findings may be inconsistent to the investor’s risk preferences. Social implications The findings suggests that Shariah-compliant firms are more conservative compared to their conventional counterparts. Originality/value The paper is the first to introduce a theoretical framework to address consistent biasness in corporate financial behaviour due to the Shariah debt screening. It may prove useful for future academic studies as well as investment managers.

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