Is Being Sharia compliant worth it?

• Published in: Economic modelling Vol. 72; pp. 353 - 362
• Main Authors: Jaballah, Jamil, Peillex, Jonathan, Weill, Laurent
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2018; Elsevier
• Subjects: Economics and Finance; Event studies; Humanities and Social Sciences; Islamic finance; Religion; Religion; Z12; Event studies; Islamic finance; G14; P51
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2018.02.011

We investigate the effect of Sharia compliance on stock valuations. To this end, we examine the price effects of additions to and deletions from the Dow Jones Islamic Market Index (DJIMI). Using the event study methodology, we measure abnormal returns for companies from Muslim countries and the US over the period of 2000–2017. We find that additions to the Islamic index lead to a positive stock market reaction in Muslim countries but a negative reaction in the US. Conversely, deletions from the Islamic index generate a negative stock market reaction in Muslim countries but a positive one in the US. The differing valuation effects can be explained by different perceptions of investors. In Muslim countries, investors have a positive perception of the Sharia compliance because of religious beliefs, while in the US they negatively react because of a negative perception of Islam and of the restrictions associated with Sharia compliance. •We investigate the price effects of additions to and deletions from Islamic indices.•Being Sharia compliant has a significant impact on stock market valuation.•The impact of additions on market valuation is negative in the US but positive in Muslim countries.•Conversely, deletions are positive for market valuation in the US but negative in Muslim countries.•These results support the view of a different investor perception of the Sharia compliance of firms in both regions.