Financial performance of Shariah-compliant investment: evidence from Malaysian stock market

The present study examines the impact of the introduction of Shariah-compliant Index (SI) by Bursa Malaysia on the performance and liquidity of included shares. We use an event study methodology to estimate mean cumulative abnormal returns (MCARs) in the days surrounding the event. We, also, investigate changes in the volume of trade and bid-ask spread in windows surrounding the event day, as a proxy for changes in liquidity. Our findings show that, overall, introduction of SI had a positive impact on the financial performance of included shares. This is due to an estimated 21.73% MCAR, and 110.22% change in the volume of transaction during Day 16 to Day 135 after the event period. We, also, found 19.63 percentage changes in percentage bid-ask spread during the same period (Day 16 to Day 135). However, increase in the bid-ask spread is interpreted as a sign of increase in the cost of information asymmetry between market makers and informed traders, rather than an indication of decrease in market liquidity.