Zaheer Anwer; Shamsher Mohamad Ramadili Mohd; Mohamed Eskandar Shah Mohd Rasid (INCEIF, 2017)
This study examines the impact of ethical and Shariah screening on idiosyncratic risk, performance and dividend policy decisions for US market for the period 2006-2015. A unique dataset is utilized to construct representative portfolios of Socially Responsible Investing (SRI), Shariah compliant investment and Market (proxy). The existing literature suggests that constraints on stock selection imposed by screening may limit investment universe and make faith based portfolios sub-optimal. Therefore, the investors who want to follow their religious or social beliefs need to incur cost of their values. Our results reveal that Shariah compliant investors are slightly disadvantaged in terms of idiosyncratic risk. However, they pay the price of holding religious beliefs by accepting lower risk-return trade off while SRI investors bear no such cost. Moreover, that there is not much variation in dividend policy of the faith based portfolios as compared to market proxy portfolio and good corporate governance promotes dividend payment for the sample portfolios. Furthermore, the firms with low idiosyncratic risk, low financial constraints, high book-to-market-assets ratio, high size and earned equity tend to pay higher dividends. Finally, it had been found that Shariah firms, unlike the market and SRI firms who prefer retaining excess cash, utilize high free cash flows to pay dividends to reduce agency conflicts.
