This paper reports evidence of a banking liquidity impact on stock prices in the three Asean countries. Banking liquidity impacts suggested by Friedman is yet to be fully investigated nor verified despite several attempts. If improved liquidity of banks leads to credit expansion, which in turn leads to more positive net present value projects undertaken by firms, earnings of the latter must go up, and hence the share prices should rise. This link is worth an investigation. According to an influential of the US stock market, up to 52% of share returns are due to changes in the macro economy. Using a 3-equation structural model as well as employing corrections for cross-section dependence, we examine the link between money supply, liquidity and stock prices over 2001:4Q and 2012:2Q in three developing countries. It is found money supply changes lead to a positive liquidity effect and banking liquidity impacts share market prices positively. These findings are new and in support of Friedman's liquidity proposition, and also constitute evidence of a banking liquidity having a positive effect on asset prices.

In this concluding chapter, we summarize of the main themes and ideas in the preceding chapters before considering the challenges the Islamic financial services industry is facing in the second decade of the twenty-first century. The first contribution of this book is that we have sought to connect the Islamic banking theories to the rich conceptual framework already developed over some five decades that form the basis of research (and graduate courses) on conventional banking and financial intermediation, in particular, information asymmetries, adverse selection, moral hazard, agency theory, optimal contract design and incentive structures.

There is a body of received theories which suggest that tax policy changes actually influence the value of corporations, and affect capital market values. There is strong evidence of share price being changed whenever good or bad news from tax changes occur. This paper provides a very short review of well-known theories, with the aim of showing how tax changes relating to dividends in Malaysia and in the USA do actually affect the values of shares in one mid-income and one high-income economy. Malaysia’s policy change in 2007 to streamline the dividend credit system into a single-tier tax system led to share price increases in Bursa Malaysia. Tax effect in the USA was tested using the good news of dividend tax cuts passed into law on three dates over 2003 and 2010. These findings are very much policy relevant for the ongoing debate, for example, in Malaysia on introducing future goods and sales tax to reduce other taxes.

A new type of debt securities called sukuk certificates have grown to US $840 billion in 11 financial markets as of 2011. These Islamic debt instruments share some features similar to conventional bonds, so market operators treat both as bonds. Whether it is appropriate to treat sukuk certificates as conventional bonds is empirically tested in this paper. If the yields of sukuk are the same as those of conventional bonds, Granger causality tests could confirm their equivalence. Practically the tests show otherwise. Also, the yields of sukuk instruments are significantly higher than yields of conventional bonds even after controlling issuers, rating quality and tenure in matched samples tests. Finally, sukuk issuance affects the issuing firm's beta risk significantly, which is consistent with capital structure theory. These new findings on the 10-year old Islamic debt market have regulatory and market making policy implications as to whether sukuk instruments should be classed as a new class of financial instruments, and not as bonds. Future research and market practices have to re-investigate a number of issues anew because sukuk market is for a different class of debt

This paper reports new findings about differential impacts political events have on share prices of firms connected to government in power compared to firms with no political connections. Political connection has been alleged as valuable in popular press in this mid-income economy studied, so it is worth an investigation. Significant share price increases of 4% or more abnormal returns accrue to connected firms relative to unconnected firms when identical political events occur. The impact is very pronounced during a severe economic crisis, when the stakes were high about an incumbent government being re-elected. Our finding of higher value of politically connected firms is due to the expected value of preferential treatments, preference in project selections and access to state benefits. Thus, share prices of politically connected firms react with greater impacts than non-politically connected firms to announcements of identical political events.

This book is the outcome of a joint effort of a number of senior practising professionals as well as leading research scholars and educators in Islamic finance. The result is a reliable book on the subject of sukuk securities. Though this type of security is new ro modern Islamic finance, it has its historical roots some centuries earlier as a novel instrument developed in the Turkish Empire based on earlier practices of government treasuries to raise money. Sukuk securities were first offered just about 20 years ago as part of a slew of new Islamic financial products to fund activities mostly over a finite horizon, since these are financing contracts priced not by using interest rates but by using returns on profit sharing- based contracts and asset- backing for the finance provided.

The money supply impacts on interest rate and liquidity were first proposed in 1961 by Friedman, the late Nobel laureate. The liquidity effect has yet received unanimous empirical support. Also, research interest on liquidity subsided in the 2000s. Using quarterly data over 1960–2011 and simultaneous solution to a system of equations, this paper reports positive liquidity effect from money supply. By extending the system of equations with a liquidity equation and after controlling the effect of earnings, evidence is found of a significant positive effect from liquidity on share prices. Money supply is found to be endogenous as in post Keynesian theory. These findings, obtained after solutions to several econometric deficiencies in prior studies, provide clear verification of the endogenous money supply theory, money effect on liquidity and on the extension of the model for a liquidity effect on asset prices.

Firms are increasingly resorting to private placements in recent years, yet there is no published study of emerging markets. There is a unique opportunity to study this behavior during a severe financial crisis, when firms resorted to private placements to recover financially distressed firms. Our analysis using data over fifteen years shows (a) a significant 2–3% positive share price reaction, affirming asymmetric information effect, (b) a significant volume activity, and (c) the price impact is different across a period of a major financial crisis. If the proceeds from placement are earmarked for investment, share price is negatively (positively) correlated during the crisis (non-crisis) periods. Our finding on regulation is inconsistent with prior reports in developed markets: this is explained by the stricter restrictions on trading of private issues in emerging market. These results provide modest new contributions to the literature on private placements.

The sukuk securities or Islamic asset-backed debt securities truly started to be offered in organized markets as publicly listed instruments only in 2000, so at the time of writing it is a 12-year-old market. There is a record of its first private issue in 1978 in Saudi Arabia, after an article in Islamic Economic Studies some years earlier had suggested this instrument to be a suitable and safe debt instrument with safeguards for investors and being consistent with ethics long since forgotten in issuing debt instruments in past Islamic empires. It has since been widely accepted as an Islamic financial product for debt-raising with one important principle, namely asset ownership of part of the assets of a borrower which gives this instrument asset backing, a unique feature in debt markets. Historical reference to sukuk is found in the records of the Abbasid Empire established in circa 900 soon after Islam spread to the Byzantine region in what is known today as Jordan, Iraq, Palestine and Syria.

This article evaluates how tax reforms affect stock prices of local and foreign firms in Oman and Saudi Arabia. Both countries introduced corporate tax on foreign firms, exempting local firms from corporate tax, when they moved away from a pre-existing Islamic tax neutrality policy. These reforms were implemented in 2009 in Oman and in 2004 in Saudi Arabia. These tax reform events – applying to foreign firms and not applying to local firms in the same markets – offer ideal experimental situations in two economies to test the taxation theories on how stock prices must react. We find that the results support the Modigliani- Miller and Elton-Gruber tax theories in two ways. Firstly, foreign firms that had their taxes reduced experienced stock price increases. Secondly, local firms not subjected to tax or tax reduction showed no visible tax effect. These are theory-consistent findings in the unique tax environments in these two Islamic countries, which moved away from tax neutrality, enabling us to obtain very clear evidence on modern theories of taxation. In our view, this evidence is significantly important addition to the literature on tax and taxation and for those contemplating a move away from Islamic tax neutrality.