4. Theses

Sukuk is dominating the Malaysian capital market with strong support from the government, mega-conglomerates and firms. As an important source of firms' financing, sukuk is increasingly catching up with existing conventional debt in terms of transaction volume and the number of deals. In spite of the rising interest among issuers in sukuk offers, research to appraise firm's issuance motives and the subsequent effects on shareholders' wealth upon sukuk and conventional bond announcement remains limited. Hence, through this initial study, firstly, we examine the association of firm specific characteristics with the respective debt security principles offers. Secondly, we also investigate the impact of each debt security offer announcement on issuer overall shareholders’ wealth effects. To address the first issue, we employed the dynamic GMM (both difference and system) analyses for testing the “partial adjustment model” with a view to investigating whether firms maintain an optimal target debt ratio when issuing each debt security principles, consistent with the trade-off theory key predictions. We also used the same model to examine the firm’s specific determinants of target debt ratio in an integrated approach. To address the second issue, we adopt both, “event-study” methodology and “wavelet” analysis. The aim is to examine the true dynamics of relationship between the debt security announcement and the shareholders’ wealth effects, given multi-horizon nature of investors.

The meaning of investments is that you sacrifice something valueable now in order to gain benefit from it in the future. Timing of the investment is of great importance (McDonald & Siegel, 1986, p. 724). One could invest in real assets, i.e. land, buildings, machines, and knowledge which are used in order to produce future goods and services. Investments could also be made in financial assets, such as stocks and bonds, which do not contribute directly to production but are used as claim-holdings on real assets. There are three main types of financial assets: fixed-income or debt securities, derivative securities and equity. Thus, investments operate mainly in financial markets. The major players of the financial market are firms, which mostly raise funds; households, which mostly save; and governments, which may act as borrowers as well as lenders. Since corporations and governments do not sell the largest part of their securities directly to individuals, the role of financial intermediaries is of great importance. Between the security issuer and the ultimate security owner, in most of the cases, financial institutions such as mutual funds, pension funds, insurance companies and banks facilitate the process (Bodie et al., 2009, p. 1-33). One of the most common measures of stock and bond market performance is by indexes. Indexes are computed and published daily, providing investors possibilities to easily monitor performance of a particular equity (Bodie et al., 2009, p. 38). As globalization has spread international trade and cross border transactions have increased. Thus, daily information of the performance of indexes from all over the world has become a very important part of daily news for investors.

Among the available liquidity management instruments in Islamic banking, only sukuk of a particular type meet the requirements of HQLA (in principle) as defined by the Basel Committee and adapted for Islamic finance by the IFSB (Islamic Financial Services Board) (IFSB, 2017). Candidates for HQLA are only international sukuk, i.e. sukuk that are issued in an international currency, sukuk that are also publicly listed, and sukuk that are traded not only locally but also internationally. Sovereigns and international institutions such as the IDB (Islamic Development Bank) have issued almost all sukuk of this caliber. In this PhD thesis, the research will make empirically informed qualitative projections on the outlook for HQL (high quality liquid) sukuk to constitute the LAB (liquid asset buffer) portfolio for an Islamic megabank MDB (multilateral development bank) in the context of a rising global interest rate environment, falling oil prices, and a challenging global environment. Further qualitative projections about the prospects for the sukuk market are made based on a few case studies that encapsulate some of the critical limitation facing the sukuk market.

This research investigates the determinants of Malaysian Sukuk’ credit rating by studying firm financial characteristic, corporate governance attributes, macroeconomic factors, and Sukuk structures. The sukuk structures determinants examine during the pre- and post-Shariah governance reform period (SG2010) to ascertain the effectiveness of the governance reform. Lastly, this research investigates the wealth effects of change in Sukuk ratings (upgrading or downgrading). Both listed and unlisted firms are analysed, with total 328 sukuk issuances and 1110 sukuk rating announcements from 2009 to 2014. Ordered logit regression and generalized ordered logit regression are used to explain the impact of different determinants on sukuk credit rating. Event study methodology was applied to ascertain the wealth effect of 16 sukuk upgrade and 20 sukuk downgrade announcements. The results on determinants of sukuk credit ratings indicate that a positive sukuk credit rating is associated with financial information, governance attributes, and sukuk structure whilst the macroeconomic factors did not influence sukuk credit ratings. More precisely, firm size, profitability, and leverage had significant positive effect on sukuk credit rating for listed firms whilst only firm profitability had a positive effect on sukuk credit rating for unlisted firms.

This thesis evaluates the wealth effects of corporate Sukuk issuances, based on specific sample traits, for the three largest issuing countries: Malaysia, Indonesia and Saudi Arabia. The sample traits include underlying structure, size of issuance and tenor. Previous studies are inconclusive and relate mainly to Malaysian firms only. This could be attributed to the failure to incorporate the effects of Sukuk types, properly identified crisis period effects and market differences. Bai-Perron (2003) break-point analysis is used to correctly identify the crisis periods for the sample. Event study methodology is applied to ascertain market reaction to announcements for a 51-day announcement window: (-40, +10). The cumulative average abnormal returns were estimated after adjustment for non-synchronous trading using the Scholes and Williams (1977) technique and cross-correlation using the Kolari-Pynnonen (2010) method. Similar break-points were observed for Malaysia and Indonesia, whereas Saudi Arabia had delayed and sustained contagion effects. For wealth effects, the results imply that sample traits affect market reaction significantly. The Malaysian market reacts positively to debt-based issuances before and after the crisis. Reaction to equity-based issuances is significantly negative after the crisis. Reaction is positive for larger issuances and shorter tenors. The Indonesian market reacts positively to debt-based issuances during the crisis period. This can be attributed to high issuer ratings, small issuance size, short tenors and high demand. Saudi market reaction is negative post-crisis, similar to the market reaction to convertible bond announcements as documented in the literature.