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Empirical evidence of risk shifting in bonds and debt-based sukuk: The case of Malaysian corporations

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dc.contributor.affiliationsFaculty of Science and Technology
dc.contributor.affiliationsUniversiti Sains Islam Malaysia (USIM)
dc.contributor.affiliationsInternational Centre for Education in Islamic Finance
dc.contributor.affiliationsUniversiti Sains Malaysia (USM)
dc.contributor.affiliationsOxford Centre for Islamic Studies
dc.contributor.authorHamzah S.R.en_US
dc.contributor.authorIsmath Bacha O.en_US
dc.contributor.authorMirakhor A.en_US
dc.contributor.authorAbdul Kader Malim N.en_US
dc.date.accessioned2024-05-28T08:44:34Z
dc.date.available2024-05-28T08:44:34Z
dc.date.issued2018
dc.description.abstractPurpose: The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored � one needs to only witness the record growth of global debt even after the global financial crisis. Design/methodology/approach: To identify the signs of risk shifting existence in the corporations, this paper compares each corporation�s operating risk before and after issuing debt. Operating risk or risk of a firm�s activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has � EBITDA can be extracted directly from firms� accounting data and is not model-specific. Findings: Risk shifting can be found in not only the bond system but also the debt-based sukuk system � a noteworthy finding because sukuk, supposedly in a different class from bonds, have been criticized in some quarters for their apparent similarity to bonds. On the other hand, this study thus shows that equity feature, when it is embedded in bonds (as in convertible bonds) or when a financial instrument is based purely on equity (as in equity-based sukuk), the incentive to shift the risk can be mitigated. Research limitations/implications: Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replace debt, they must also be aware that imitative sukuk pose the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirror bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities. Originality/value: This paper differs from the previous literature in two important ways, viewing risk shifting behavior not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behavior and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equity holders� incentive to engage in risk shifting behavior. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be a controlled behavior � and that one way of controlling risk shifting is by implementing the risk sharing feature of equity-based financing into the financial system. � 2018, Emerald Publishing Limited.
dc.description.natureFinalen_US
dc.identifier.doi10.1108/JIABR-06-2016-0068
dc.identifier.epage700
dc.identifier.issn17590817
dc.identifier.issue5
dc.identifier.scopus2-s2.0-85055454082
dc.identifier.spage687
dc.identifier.urihttps://www.scopus.com/inward/record.uri?eid=2-s2.0-85055454082&doi=10.1108%2fJIABR-06-2016-0068&partnerID=40&md5=bb56b6cbd9eac50076a96d121ef710aa
dc.identifier.urihttps://oarep.usim.edu.my/handle/123456789/9383
dc.identifier.volume9
dc.languageEnglish
dc.language.isoen_US
dc.publisherEmerald Group Publishing Ltd.en_US
dc.relation.ispartofJournal of Islamic Accounting and Business Research
dc.sourceScopus
dc.subjectBondsen_US
dc.subjectDebt-based sukuken_US
dc.subjectEquity-based sukuken_US
dc.subjectGlobal financial crisisen_US
dc.subjectRisk sharingen_US
dc.subjectRisk shiftingen_US
dc.subjectsukuken_US
dc.titleEmpirical evidence of risk shifting in bonds and debt-based sukuk: The case of Malaysian corporations
dc.typeArticleen_US
dspace.entity.typePublication

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