Do sukuk ratings non-contingently affect stock returns? : evidence from Indonesia and Malaysia

Objective: The objective of the article is to investigate two issues. First, whether the Islamic bond (sukuk) ratings are the key determinant in affecting stock returns and, second, whether firm-characteristic variables moderate the sukuk ratings effect on stock returns. Research Design & Methods: This study applied the panel estimated generalized least squares (EGLS) regression for two samples (from Indonesia and Malaysia) spanning two years, 2015-2016, for all variables, except for the intrinsic-value variable which spanned eight years, 2009-2016. Findings: The results show that the direct and positive effect of sukuk ratings on stock returns are significantly present in Malaysia but not in Indonesia, while the positive and significant moderating effects of firm-characteristic variables – especially leverage and intrinsic value of the firm - are more pronounced in the positive sukuk rating-stock return relationship in Indonesia than in Malaysia. Implications & Recommendations: The types of firm-characteristic variables involved in determining the effect of sukuk ratings on stock returns depend on the country’s characteristics. As a result, adopting sukuk ratings to determine stock returns is not constant but, instead, it is contingent - to an extent – on other variables: firm-characteristic variables. These results suggest that still many factors should be explored so as to reach a better judgment on the quality of credit, including sukuk. Contribution & Value Added: While most previous studies employed the event-study method and did not specifically consider firm-characteristic effects on analysing the relationship between sukuk ratings and stock returns, this study sought to reveal whether sukuk ratings are the key determinant in affecting prices (or stock returns), and the extent to which firm-characteristic variables moderate the relationship between sukuk ratings and stock returns.