Does Innovation in Sukuk structure
create Value? A study of post-crisis
Sukuk wealth effects in Malaysia
Ziyaad Mahomed, *Shamsher. M. and **M. Ariff
*Professor Dr Shamsher Mohamad Ramadili Mohd, INCEIF
**Professor Dr Mohamed Ariff, Bond University, Australia, UPM
 Brief introduction to topic
 Significance of the Study
 Research Objectives
Contents
 Literature Review
 Data Sample & Methodology
 Results
 Conclusions & Recommendations
 The constant search for Islamic product innovation ultimately requires that it
translates into increased firm value
 The recurrent emergence of innovative Sukuk structures expand the profile of
the Islamic Capital Market sector
Significance of
Study
 Malaysia is the largest Sukuk issuer in the world, with issuing firms consistently
vying for exotic structures that explore the boundaries of Shariah acceptability
 However, it is not known whether Sukuk innovation impact positively on issuing
firm share price
 The type of financing a firm opts for when raising funds for business initiatives is
shown to have a signaling effect in the market (Ross, 1977) :Signaling Theory
 Despite sufficient evidence on the predictability of stock price reaction to Sukuk
announcements, the evidence is inconclusive
 Bonds and Sukuk share characteristics of yield, tradability and rating so it is
expected that Sukuk wealth effects would be the same as bond announcements
 Objectives
Objectives &
Research
Questions
 To determine whether Malaysian Corporate Sukuk issuance post-crisis
represents value-adding financial innovation
 To ascertain the wealth effects of Sukuk issuances with different
underlying structures: debt and equity-based
 To evaluate whether Sukuk underlying structure can be used to explain
firm optimal capital structure
 Research Questions
 Is market reaction to post-crisis Sukuk announcements affected by
underlying structure?
 Does the market perceive Sukuk as a separate asset class to conventional
bonds?
 Are Sukuk disclosed according to their underlying structure?
Sukuk vs
Bonds
Literature
Review Structure
Sukuk &
Optimal
Structure
Announcement
Effects: Identifying
influencing factors
Underlying
Structure:
AAOIFI vs SAC
5
 Market reaction to conventional bond announcements have been mixed
and inconclusive
 However, when bonds are separated in terms of underlying structure
(straight and convertible bonds), then the results become clear:
Literature
Review
 Announcements of straight bonds - that are pure debt instruments - do not
produce any significant reaction
(Eckbo, 1986; Ashhari et al., 2009; Ibrahim & Minai, 2009; Godlewski et al.,
2011)
Why ? Possibly a result of cancelling effects from positive reaction due to
signaling of strong firm quality and negative reaction from increasing
bankruptcy and agency costs (Jensen & Meckling, 1976)
 Announcements for convertible bonds - that have both debt and equity
elements – result in negative reaction (Abdul Rahim, 2012) – Based on
meta-analysis of 35 studies
Why? Possibly due to dilution effects from convertibility that outweigh agency costs or
tax effects.
6
Literature
Review –
Sukuk Wealth
Effects
Year
2009
Author/s
Ashhari et al.
Sample : Country (No of Events)
Malaysia (not mentioned)
Period
2001 to 2006
Findings - Reaction
Positive
2009
Ibrahim & Minai
Malaysia (81)
2001 to 2006
Positive
2010
Nagano
Malaysia (72)
2001 to 2007
Positive & significant
2011
Godlewski et al.
Malaysia (77)
2002 to 2009
Negative & significant
2011
Modirzadehbami
& Mansourfar
Malaysia (45)
2005 to 2008
Negative
2013
Alam et al.
Malaysia, Indonesia, Singapore, Pakistan,
UAE, Bahrain and Qatar (Globular)
2004 to 2012
No reaction over long-term
Considers Crisis Period
Negative during crisis
Positive & significant reaction post-crisis
2013
Ahmad &
Rusgianto
Malaysia (29)
2009 to 2010
Positive but not significant
2014
Abd Rahim &
Ahmad
Malaysia (sample size not mentioned)
2004 to 2011
Positive before crisis (2008-2009)
Considers Crisis Period
Negative during & after crisis (2010-2011)
2014
Elian & YoungTaft
Saudi Arabia (10), Bahrain (3), UAE (1),
Kuwait (1).
2004 to 2012
2014
Godlewski, et al.
Cayman Islands (9), Bermuda (2), Indonesia 2006 to 2013
(1), Malaysia (111), Qatar (1), Saudi Arabia Considers individual
(3), Singapore (3), UAE (1).
contracts
Ijara has positive influence on stock price
2014
Hanifa, et al.
Malaysia (129)
Partnership-based Sukuk: Negative reaction
2001 to 2013
Considers underlying
structure
Positive before but Negative at event.
Net zero wealth effect
Exchange-based Sukuk: No net reaction
 Previous studies do not account for the effects of crisis and/or Sukuk type
 Studies are either on Malaysia or multi-country. Though multi-country issuances are not
distinguished based on separate markets
 No documented studies on impact of Sukuk announcement effects and financial innovation
Research Gaps
Identified
 Sukuk studies on optimal capital structure consider the underlying structure and theorize
based on debt-based Sukuk increasing leverage and equity-based Sukuk decreasing
leverage, without considering accounting disclosure
Differing crisis periods in previous Sukuk wealth effect studies
Year
Authors
Crisis Period
Announcement Effect
2013
Alam et al.
2008 – 2009


High negative reaction during crisis
Positive and significant post-crisis
2013
Ahmad & Rusgianto
2009 – 2010


Positive and insignificant post-crisis
Negative during crisis
2014
Rahim & Ahmad
2008 - 2009


Positive prior to crisis
Negative during and after crisis
Data &
Methodology
Data Collection
Zawya database, DataStream, Thomson Reuters & Bloomberg
Sample
24 listed companies, 24 Sukuk events over 5 years
Methodology
•
•
Multiple Breakpoint Analysis using Bai-Perron (2003): GIC
Event Study methodology using Sharpe’s (1964) Market Model:
𝑅𝑖𝑡 = 𝛼𝑖 + 𝛽𝑖 𝑅𝑚𝑡 + 𝑒𝑖𝑡
•
The abnormal return (𝐴𝑅𝑖𝑡 ) is calculated as:
𝐴𝑅𝑖𝑡 = 𝑅𝑖𝑡 −(𝛼𝑖 + 𝛽𝑖 𝑅𝑚𝑡 )
•
•
Scholes-Williams (1977) adjustment for non-synchronous trading
Kolari-Pynnonen (2010) adjustment for cross correlation
CAAR Significance testing:
• Parametric: Boehmer, Masumeci & Poulsen (1991) : BMP
• Non-Parametric: Corrado & Zivney (1992) Rank Test
Accounting Treatment
• Review of financial reports of issuing firms
9
Descriptive Statistics: Sample Based on Size
By Size
All
Findings on
Wealth Effects
Descriptive
Statistics
N
24
Mean
Median
Std Dev
Min
Max
Sum
2,570
1,500
3,425
70
15,000
61,670
Debt-based
13
2,473
1,500
2,808
70
10,000
32,150
Equity-based
11
2,684
1,800
4,183
120
15,000
29,520
Descriptive Statistics: Sample Based on Tenor
By Tenor
N
Mean
Median
Std Dev
Min
Max
All
24
14.96
15.00
9.12
0
30
Debt-based
13
15.31
15.00
8.11
5
30
Equity-based
11
14.55
15.00
10.60
0
30
Based on Size & Tenor
CAARs for the Event Window: Debt-based
N
Event
Window
CAAR
Pos:Neg BMP test
prob.
Rank test
prob.
0.004
9:04 -0.06
(0.953)
-0.06
(0.953)
(-1...1)
-0.006
6:07 -1.47
(0.142)
-0.88
(0.380)
(0...2)
-0.006
5:08 -1.66*
(0.096)
-0.99
(0.323)
(-2...2)
-0.009
5:08 -1.66*
(0.097)
-1.02
(0.308)
(-3...3)
-0.011
5:08 -1.46
(0.145)
-0.73
(0.468)
0.011
9:04 1.84*
(0.067)
2.10**
(0.036)
(0...1)
-0.004
7:06 -1.41
(0.160)
-0.84
(0.403)
(0...2)
-0.006
5:08 -1.66*
(0.096)
-0.99
(0.323)
13 (-40...10)
CAAR Results:
Debt-based
(-11...-8)
*, **, *** denote significance
at 0.1, 0.05 and 0.01 acceptance levels respectively.
CAARs for the Event Window: Debt-based
N
Event Window
11 (-40…42)
(-40...10)
CAAR Results:
Equity-based
(-40...-25)
CAAR
0.001
Pos:Neg BMP test
6:05 0.62
prob.
(0.536)
Rank test prob.
0.32
(0.752)
-0.009
7:04 0.30
(0.762)
-0.38
(0.705)
9:02 2.54**
(0.011)
2.16**
(0.031)
0.022
(-1...1)
-0.005
6:05 -1.15
(0.250)
-1.59
(0.111)
(0...2)
-0.007
5:06 -1.52
(0.128)
-1.88*
(0.060)
(-2...2)
-0.006
5:06 -1.66*
(0.098)
-1.37
(0.169)
(-3...3)
0.004
7:04 0.49
(0.624)
-0.52
(0.601)
(0...1)
-0.006
5:06 -1.38
(0.167)
-2.44**
(0.015)
(0...2)
-0.007
5:06 -1.52
(0.128)
-1.88*
(0.060)
*, **, *** denote significance
at 0.1, 0.05 and 0.01 acceptance levels respectively.
Comparative CAAR Movements for Malaysia: Post-Crisis
0.1
0.08
0.06
CAAR
0.04
0.02
0
-0.02
-40
-38
-36
-34
-32
-30
-28
-26
-24
-22
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
-0.04
Summary of
Announcement
Effects
-0.06
-0.08
-0.1
Total Sample
Debt-based
Equity-based
Announcement effects based on type of Sukuk, pre crisis (Mahomed et al. 2016)
and post crisis (current study)
Period
Hypothesis
Malaysia
Debt-based
Equity-based
Debt-based
Pre-crisis (Mahomed, et al. 2016)
positive
(negative)
positive **
Post-crisis
(negative)
positive
No net impact
*, **, *** denote significance
at 0.1, 0.05 and 0.01 acceptance levels respectively.
Equity-based
No net impact
8
10
Finding I : Announcement effects
 Previous studies prior to crisis: positive reaction for Sukuk but no reaction for straight bonds
 Our findings indicate that Sukuk issuance, like straight bonds, does not increase firm value
Findings I:
Announcement
Effects
 Market no longer distinguishes between different Sukuk underlying structures either:
Debt-based vs Equity-based reaction is almost the same
 Both debt and equity-based Sukuk issuance result in NO NET REACTION, the SAME as STRAIGHT
BONDS or PURE DEBT BONDS
 Probably due to a set-off from negative reaction due to increased agency costs from debt issuances
(Jensen & Meckling, 1976) and positive reaction from the signaling of stronger firm quality (Ross, 1977)
Potential attributing factors:
 Conservativism in the market post-crisis, demanding a higher risk premium
 Landmark statement by Mufti Usmani (2007) and subsequent AAOIFI Sukuk revisions (2008) did not
effect change as Malaysia is bound by the SAC of the Securities Commission:
 prohibiting the repurchase of Sukuk assets at face value but at market value,
 prohibiting the preferential rights of partners, and
 prohibiting loans from issuers to subscribers in the event of profit shortfalls
 Results support the contention of Miller et al. (2007), Ayub (2005) and Wilson (2008) that
Sukuk do not constitute financial innovation, at least from the perspective of market behavior
Findings II : Optimal Capital Structure
 Capital structure theory suggests firms will attempt to achieve optimal balance between debt and equity in order
to maximize the value of the firm (Modigliani & Miller, 1963)
 Previous studies apply this theory to interpret firm issuance factors for debt and equity-based Sukuk (Hanifa et al.,
2015; Alam, et al., 2013)
Findings II:
Optimal Capital
Structure
 Our findings indicate that issuers do not make a distinction between debt and equity-based issues based on
this theory at least: All Sukuk issues, irrespective of underlying structure, are treated as liabilities or debt-based
borrowings
 Our findings imply that Sukuk in Malaysia can only be interpreted based on their debt proportion in a leverage
calculation
 Two additional factors support this finding:
 No net wealth effects (Findings I)
 Malaysian tax incentives on debt and equity-based issues are the same: In theory, optimizing behavior is
achieved through a trade-off between tax shield benefits and financial risk from debt issuance. But this is
not the case in Malaysia
 Findings imply that Malaysian Sukuk are at threat of convergence with conventi0nal bonds, and are no longer
perceived as financial innovation, irrespective of the exotic underlying structures
Summary &
Recommendations
Is market reaction to post-crisis Sukuk announcements affected
by underlying structure?
NO
Does the market perceive Sukuk as a separate asset class to
conventional bonds?
NO
Are Sukuk disclosed according to their underlying structure?
NO
Recommendations
To be perceived as financial innovation that results in value addition and increased firm
value, we suggest:
 Malaysian regulatory policy (SAC resolutions) should consider incorporating AAOIFI
resolutions to improve marketability both domestically and internationally
 Financial innovation is not an end in itself: it should be matched with value addition, not
just novelty, as the market quickly filters gimmicks and real value
 For firms in search of alternatively packaged bonds, they should issue Sukuk as they
benefit from:
 Tax incentives and deductions for issuance costs, irrespective of structure
 No apparent disadvantages in issuance since market behavior is the same for straight bonds
Thank you for your time ..