Do Market Timing Incentives Affect The Debt-Equity Choice of Malaysian Shariah-Compliant IPOs?

Authors

  • Khemaies Bougatef University of Kairouan
  • Oumayma Kassem Higher Institute of Computer Science and Management of Kairouan, University of Kairouan, Tunisia.

DOI:

https://doi.org/10.12928/ijiefb.v6i1.7967

Keywords:

Capital structure, market timing, Shariah compliance, Malaysia, IPO, panel data

Abstract

Introduction: Empirical and theoretical literature points out that market timing attempts could shape financing decisions and persistently affect capital structure. However, prior studies on market timing did not distinguish between Shariah-compliant and non-compliant firms although Shariah compliance considerations may affect market timing incentives.

Purpose: This paper aims to fill this gap in the literature by investigating whether market timing theory predictions are relevant in the case of Shariah-compliant firms.

Methodology: This paper aims to fill this gap in the literature by investigating whether market timing theory predictions are relevant in the case of Shariah-compliant firms. We use a sample of 40 Malaysian Shariah-compliant companies that went public during the period from 1 January 2015 to 31 December 2018.

Findings: The findings provide useful implications for investors and portfolio managers interested in investing in Shariah-compliant IPOs. They should identify market timers to avoid low subsequent returns of equity issuers.

References

Adam, N.L. and Bakar, N.A. (2014), “Shariah screening process in Malaysia”, Procedia - Social and Behavioral Sciences, Vol. 121, 113-123.

Akbar, S., Khan, S., Haq, Z.U. and Khan, M.I. (2023), "Capital structure dynamics of Shariah-compliant vs noncompliant firms: evidence from Pakistan", International Journal of Islamic and Middle Eastern Finance and Management, 16 (2), 366-383.

Allini, A., Rakha, S., McMillan, D. G., & Caldarelli, A. (2018), Pecking order and market timing theory in emerging markets: The case of Egyptian firms. Research in International Business and Finance, Vol. 44, pp. 297-308.

Alnori, F., and Alqahtani, F. (2019). Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia. Emerging Markets Review, 39, 50-67.

Alti A., 2006, “How persistent is the impact of market timing on capital structure”, Journal of Finance, 61, 1681-1710.

Asutay, M. and Marzban, S. (2012). “The impact of asset-based versus market capitalization- based Shari’ah screening on US and Japanese equities: an empirical analysis”. Journal of Asian and African Studies, 11(2), 151–165.

Baker, M., and Wurgler J., 2002, “Market timing and capital structure”, Journal of Finance, 57, 1-32.

Barclay M.J., and Smith C.W, 1995a, “The maturity structure of corporate debt”, Journal of Finance, 50, 609-631.

Belkhir, M., Maghyereh, A., & Awartani, B, (2016). Institutions and corporate capital structure in the MENA region. Emerging Markets Review, 26, pp. 99-129,

Boubaker A. and Nguyen D.K., 2009, “Does financing behavior of Tunisian firms follow the predictions of the market timing theory of capital structure?”, Economics Bulletin, 29,169-181.

Bougatef K. and Chichti J.E., 2010, “Equity market timing and capital structure: evidence from Tunisia and France”, International Journal of Business and Management, 10, 67-177.

Bougatef, K. and Nejah, I. 2022. The COVID-19 pandemic and herding behaviour among investors in Shariah-compliant stocks. Journal of Islamic Accounting and Business Research, Vol. 13(5), 832-844.

Chen, D. H., Chen, C. D., Chen, J. & Huang, Y. F. (2013), Panel data analyses of the pecking order theory and the market timing theory of capital structure in Taiwan. International Review of Economics & Finance, 27, pp. 1-13,

Derigs, U., and Marzban, S. (2008). Review and analysis of current Shariah-compliant equity screening practices. International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 285-303.

El-Gamal, M. A. 2000. “A basic guide to contemporary Islamic banking and finance”. Rice University.

El Hajjaji, H. and Moutahaddib, A. .2019. “Création d’un indice boursier islamique sur la place de Casablanca”, Researches and Applications in Islamic Finance, 3(1), 88-110.

Fama, & French, (2002). Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, Vol. 15 No. 1, pp. 1-33.

Fama E.F., and French K.R., (2004). “Financing decisions: who issue stock”, Journal of Financial Economics, 76, 549-582.

Farooq, O. and Pashayev, Z. (2020), “Shariah compliance and information transmission: evidence from an

emerging market”, Journal of Islamic Accounting and Business Research, Vol. 11 No. 8, pp. 1583-1597.

Frank, M, Z., & Goyal, V, K, (2003), Testing the pecking order theory of capital structure, Journal of financial economics, 67(2), 217-248.

Frank, M. Z., and Goyal, V. K. (2009), “Capital structure decisions: which factors are reliably important?”, Financial Management, Vol, 38 No, 1, pp, 1-37.

Fisher E.O., Heinkel R., and Zechner J., 1989, “Dynamic capital structure choice: theory and tests”, Journal of Finance, 44, 19-40.

Gaud P., Hoesli M., & Bender A., 2007, “Debt-equity choice in Europe”, International Review of Financial Analysis, 16, 201-222.

Gomes, M. C., Magnani, V. M., Albanez, T., & Valle, M. R. (2019). Effects of market timing on primary share issues in the Brazilian capital market. The North American Journal of Economics and Finance, 49, 361-377.

Guizani, M. and Ajmi, A.N. (2021). Testing the pecking order theory of capital structure in an Islamic legal system: the case of Saudi Arabia", International Journal of Islamic and Middle Eastern Finance and Management, 14 (4), 732-752.

Haron, R., & Ibrahim, K. (2012). Target Capital Structure and Speed of Adjustment: Panel Data Evidence on Malaysia Shariah Compliant Securities. International Journal of Economics, Management and Accounting, 2(2), 87–107.

Huang R., and Ritter J. R. (2009). “Testing theories of capital structure and estimating the speed of adjustment”, The Journal of Financial and Quantitative Analysis, Vol. 44, No. 2, pp. 237-271.

Huang, Y., Uchida, K., Yu, X. and Zha, D. 2021. Market timing in private equity placements: Empirical evidence from China. Pacific-Basin Finance Journal, 2021, Vol. 69, issue C, 101642.

Hussain, H. I., Ali, M., Hassan, M. K., and El-Khatib, R. (2020). Asymmetric capital structure speed of adjustment, equity mispricing and Shari’ah compliance of Malaysian firms. International Review of Economics & Finance, forthcoming.

Hovakimian A. (2006). “Are observed capital structure determined by equity market timing?”, Journal of Financial and Quantitative Analysis, 41, 221-243.

Htay, S. N. N. H., Abedeen, Z., and Salman, A. S. (2013). “Towards standardization of Shari’ah screening norms and practices”. International Journal of Humanities and Social Science Invention, 2(11), 23–30.

Islamic Financial Services Board (IFSB) (2020), “Islamic financial services industry stability report 2020”, July.

Jarallah, S., Saleh, A. S., and Salim, R. (2019). Examining pecking order versus trade‐off theories of capital structure: new evidence from Japanese firms. International Journal of Finance & Economics, 24(1), 204-211.

Karabarbounis, M., Macnamara, P. and McCord R. (2014). A business cycle analysis of debt and equity financing. Economic Quarterly, Vol. 100(1), 51–85.

Khoa, B, T., & Thai, D. T. (2021), Capital structure and trade-off theory: Evidence from Vietnam, The Journal of Asian Finance, Economics and Business, 8(1), 45-52.

Lee, J. 2021. Information asymmetry, mispricing, and security issuance. Vol. 76(6), 3401-3446.

Mahfooz, S. and Ahmed, B. 2014. “Shariah Investment Screening Criteria: A Critical Review”, Journal of King Abdulaziz University, Islamic Economics., 27(1), 111–145.

Modigliani F., and Miller M. H., 1958, “The cost of capital, corporation finance and the theory of investment”, American Economic Review, 48, 655-669.

Myers S.C., 1984, “The capital structure puzzle”, Journal of Finance, 39, 575-592.

Myers S.C., and Majluf N.S., 1984, “Corporate financing and investment decisions when firms have information that investors do not have”, Journal of Financial Economics, 13, 187-221.

Nasiri, I. and Drissi-Bakhkhat, M. 2021. The creation of an Islamic stock market index on the Moroccan financial place according to the S&P method. Researches and Applications in Islamic Finance, Vol.5 (1), 107-123.

Peillex, J. and Ureche-Rangau, L. 2012. "Création d'un indice boursier islamique sur la place financière de Paris : méthodologie et performance," Revue d'économie financière, Association d'économie financière, vol. 107(3), 289-314.

Rajan R.G., and Zingales L. (1995). “What do we know about capital structure? Some evidence from international data”, Journal of Finance, 50, 1421-60.

Rao, P., Kumar, S., and Madhavan, V. (2019). A study on factors driving the capital structure decisions of small and medium enterprises (SMEs) in India. IIMB Management Review, 31(1), 37-50.

Ratih, D, (2021), "Equity market timing and capital structure: evidence on post-IPO firms in Indonesia", International Journal of Emerging Markets, Vol, 16 No, 2, pp, 391-407.

Rehan, R., and Abdul Hadi, A. R. (2019). Capital structure determinants of Shariah and non-Shariah companies at Bursa Malaysia–Dynamic Approach. International Journal of Innovation, Creativity and Change, 6(8), 334-345.

Ritter, J.R. 1991. The long-run performance of initial Public Offerings. Journal of Finance, Vol. 46(1), 3-27.

Sahudin, Z., Ismail, Z., Sulaiman, S., Rahman, H. A., and Jaafar, M. N. (2019). Capital structure determinants of Shariah-compliant firms. Journal of emerging economies and Islamic Research, 7(1), 65-75

Smith C.W., and Watts R.L., 1992, “The investment opportunity set and corporate financing, dividend and compensation policies”, Journal of Financial Economics, 32, 263-292.

Statista Research Department, 2022. Market capitalization of shariah compliant PLCs listed in Bursa Malaysia 2016-2021. available at: www.statista.com/statistics (accessed on 29 October 2022)

Vogt, J. 2023. Managerial market timing under credit risk: how do timed buybacks and stock issuances influence the value of long-term shareholders? Global Finance Journal, Vol. 55, February 2023, 100807

Yildirim, R., Masih, M., and Bacha, O.I., 2018. Determinants of capital structure: evidence from Shari'ah compliant and non-compliant firms. Pacific- Basin Finance Journal, 51, 198–219.

Zaher, S. T., and Hassan, M. K. (2001). A comparative literature survey of Islamic finance and banking. Financial Markets, Institutions & Instruments, 10(4), 155–199.

Zhao, Y., Lee, C-F. & Yu, M-T. (2020). "Does equity market timing have a persistent impact on capital structure? Evidence from China," The British Accounting Review, Vol. 52(1), 100838.

Downloads

Published

2023-05-20

Issue

Section

Articles