Is Being Islamic Worth It?

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We investigate the valuation of the Sharia compliance of firms. Thus, we examine the price effects of additions and deletions to the Dow Jones Islamic Market Index (DJIMI). We use event study methodology to measure abnormal returns for companies from Muslim countries and the USA over the period of 2000 to 2009. We determine that additions to the Islamic index lead to a positive stock market reaction in Muslim countries but a negative reaction in the USA. We interpret these results to be a different investor perception of the Sharia compliance of firms by region. We observe that the financial crisis leads to a better perception of the addition to the Islamic index in both regions. Conversely, deletions of stocks from the DJIMI do not drive a significant stock market reaction in either region, regardless of the period. Our findings support the view that the valuation of the Sharia compliance of firms is conditional on the region of origin and the period.

Author(s):

Jamil Jaballah    
Grenoble Ecole de Management
France

Jonathan Peillex    
Léonard de Vinci Pôle Universitaire
France

Laurent Weill    
EM Strasbourg Business School, University of Strasbourg
France