ANNOUNCEMENT EFFECTS OF SUKUK IN SAUDI ARABIA: THE IMPACT ON THE MIDDLE EASTERN ISLAMIC ECONOMIC SYSTEM
Abstract
The effects of capital-raising announcements have long been used as an indicator of increased shareholder wealth (Brown & Warner, 1985). Studies on bond announcements for example, have been largely inconclusive. However, when effects are measured based on bond underlying structure – straight and convertible bonds – then the results are more conclusive (Abdul Rahim, 2012). Furthermore, issuances around crisis period are expected to result in negative market reaction as investors prefer liquidity (Fenn, 2000). Sukuk are bond-like instruments that are issued based on the Sharia guidelines and perceived to be less risky due to their risk sharing attribute. Sukuk are issued by the governments and also corporations. Sukuk can either be debt-based or equity-based. The former resembles the conventional bond and the equity-based Sukuk resembles the convertible bonds. It is interesting to ascertain the market reaction to issuance of both type of Sukuk. This study determines the wealth effects of Sukuk issuances in Saudi Arabia, around crisis period. Sukuk issues have steadily increased in Saudi Arabia and it is the second largest issuer in 2015 (Zawya, 2015). The market reaction to corporate Sukuk issuance by Saudi firms is yet to be documented and the findings of this study address this issue, especially during the crisis period when the risk aversion is high and investors prefer liquidity. The BaiPerron (2003) multiple breakpoint analysis was applied to determine the crisis period, which was between 2007 and 2010. A sample of 25 events from 18 companies, consisting primarily of debt-based Sukuk were sampled for analysis. The findings suggest that the market reacts positively and significantly to debt-based Sukuk issuance during the crisis period, contrary to the theory that postulates a negative market reaction. Though these findings seem to be unique, it is possible that it is a behavioral effect of investors requiring less liquidity premium during crisis, contrary to expectations (Chen, et al., 2007; Amihud and Mendelson, 1986).
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