Shariah-compliant investments and stock returns: evidence from the Indonesian stock market

Abstract

Purpose The purpose of this paper is to investigate the impact of the Indonesia Shariah-compliant Stock Index (ISSI) on the performance of included shares. In essence, the authors ask whether the establishment of the ISSI provides abnormal returns for the firms that are not included in the Jakarta Index. Design/methodology/approach The authors use an event study methodology to estimate cumulative abnormal returns in the days surrounding the event to examine the relationship between Shariah-compliant investments and stock returns. The estimation window of 90 trading days prior to the event (−30) to day 60 after (+60) is adopted. They also use a range of investment performance measures to provide new evidence on whether faith-based ethical investments generate superior performance compared to their unscreened benchmarks. Findings Using daily returns, the Indonesia ISSI and panel data model, the findings show that the inclusion of the ISSI has a positive impact on the financial performance of the included shares during the 41-day event window. The evidence also suggests that the ethical investment has a significant influence on the performance of stock market returns. Research limitations/implications This study offers insights to policymakers, investors and fund managers interested in the indices’ performance. A key conclusion that could be derived by bodies that regulate Islamic products and services is that investors are not only concerned about what is profitable but also what makes their investments ethical. Originality/value Although the global growth of the Islamic capital market products and services has been tremendous in recent years, very few studies focus on the Indonesian market and indeed, none of them devote sufficient attention to Shariah-compliant investments and stock returns.

Capturing the Performance of Indonesian Sharia Stock Index (ISSI) and Composite Share Price Index (IHSG) Jakarta Period 2016-2019

“…Kumar & Sahu (2017), found the presence of a long run equilibrium relation between macroeconomic indicators and Dow Jones Islamic India market index. On the other hand, Lusyana & Sherif (2017) found that the inclusion of the ISSI has a positive impact on the financial performance of the included shares during the 41-day event window. Furthemore, El Ouadghiri & Peillex (2018), found that US public attention to Islamic terrorism negatively affects US Islamic indices, suggesting that investors may make amalgams between terrorism and Islamic finance.…”

Are Islamic Stocks Less Exposed to Sentiment-Based Mispricing Than Non-Islamic Ones? Evidence From the Indonesian Stock Exchange

“…Islamic and ethical finance have a similar objective, in that individuals allocate their funds in a manner consistent with their morals and faith (Bennett & Iqbal, 2013). More specifically, morals in Islamic finance emphasise investing activity that complies with sharia principles (Lusyana & Sherif, 2017). There are many investment instruments in the Islamic capital market, including Islamic stocks, sukuk, and Islamic mutual funds.…”

“…Majdoub et al (2016) suggest that Indonesian Islamic stocks offer international diversification due to their low comovement with the stock market in developed countries. Moreover, in terms of the risk-return profile, Islamic portfolios have low systematic risk and outperform their non-Islamic counterparts (Lusyana & Sherif, 2017;Qoyum et al, 2020).…”

“…In more detail, we chose the Indonesian stock market as our sample since the country, an emerging economy, has a potential Islamic stock market whose market capitalisation share had reached 51.55% by the end of 2019 (OJK, 2018). In terms of risk, return, and co-movement, Indonesian Islamic stocks are considered to benefit from diversification (Lusyana & Sherif, 2017;Majdoub et al, 2016;Qoyum et al, 2020).…”

Does Sharia-Obedient Status Cause Firms to be Less Involved in Accrual-Based Earnings Management?

“…The Jakarta Islamic Index gives information to investors about Islamic shares (Pranata & Nurzanah, 2015). Moreover, Lusyana and Sherif (2017) suggested that Islamic capital markets had rapidly grown since the world financial crisis in 2008. In addition, they agreed that the attractiveness of the Islamic capital market in Indonesia could be seen that there were positive abnormal returns in Sharia stocks.…”