Journal Article

The last decade has witnessed a rapid expansion of Islamic financial instruments with a notable proliferation of Islamic investment certificates called sukuk. In spite of the expansion, research to appraise their growth implications remains limited. This paper investigated the structural differences within sukuk and conventional and their implications on investor return reactions. It also looked at the investors' different decision making time horizon dimensions in response to the respective debt security's announcement. Our sample consisted of 158 conventional bonds and 129 sukuk issuers between 2000 and 2013. Event-study methodology and wavelet analysis were used resulting in three major findings. Firstly, market investors perceived sukuk and conventional bonds as different financial instruments. Variations in investor reactions persisted when each sub-category of sukuk and conventional bond were examined separately. Lastly, firm value and shareholder wealth were affected in different ways upon the issuance announcement of of a specific sukuk or conventional bond. Specifically, the equity-like features within convertible bonds and partnership-based sukuk negated institutional investors' wealth, but were due to different 'dilution' arguments. Sukuk created unique wealth effects for corporate issuers, day traders and institutional investors in comparison with conventional bonds.

The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored - one needs to only witness the record growth of global debt even after the global financial crisis. To identify the signs of risk shifting existence in the corporations, this paper compares each corporation's operating risk before and after issuing debt. Operating risk or risk of a firm's activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has - EBITDA can be extracted directly from firms' accounting data and is not model-specific.