1) The document analyzes the long-term stock performance of Malaysian firms that issue Islamic bonds. 2) It finds that firms experience significantly positive abnormal returns in the two and three years following an Islamic bond issue. 3) However, firms with high growth opportunities only experience higher returns if the bond issue does not significantly change the firm's capital structure. Firms with high free cash flow experience lower returns if the bond issue increases leverage.

1.  
Yusnidah Ibrahim, Md Mohan Uddin and Mohd Sobri Minai
World Islamic Banking, Finance and Investment Conference
17 – 18 December, 2012; Hotel Istana, Kuala Lumpur, Malaysia

2. Continuous Innovative
restructuring and
of financial diversified
market by alternative
govt. securities
High High degree
concentration of earning
of ownership management

3. Coexistence
Dominance of Islamic
of Islamic and
securities conventional
bonds
Debt
Growing
financing
bond market
encouraged

4. Since 1997 crisis, domestic private debt
securities has been an important substitute of
bank loan and equity financing
Since 2000, the corporate bond market has
been growing at an average rate of 8%
Current share of corporate bond market in total
debt financing is 2.5 times compared to what it
was in 1997
The Islamic segment of the private debt security
market is growing rapidly. Currently, 39% of
total bond outstanding in Malaysia are Islamic
bonds

5.  Malaysia is the largest Islamic capital market in the world
Outstanding Islamic As percentage of
Year Bond outstanding
(billion RM) corporate bond
2008 152.8 57
2009 167.73 58.2

6. Response to continuous
Increasing dependence on regulatory initiatives and
debt financing influences
Corporate bond issuance Drift developed toward debt
relative to GDP is highest financing/Islamic debt financing
among emerging markets
Increasing dominance of
Islamic bond ? Motive for wealth maximization

7. Islamic debt
issues
Capital
structure
changes
Effect on
shareholder
wealth

8. Knowing the determinants of the debt issue
performance is necessary to
Test the
Identify the Guide
applicability of
source of corporate
capital
wealth financing
structure
creation decision
theories

9.  Short term announcement effect of security issuance is the
subject matter of many studies, for instance, Antweiler and
Frank (2006), and Eckbo and Norli (2004).
 However, Malaysian market may not be efficient enough (Kim
& Shamsuddin, 2008; Hoque, Kim, & Pyun, 2007) to capture
future implications of capital structure changes in the short
run.
 Scholars link long run underperformance of security
issuances to market timing behavior combined with slow
reacting investors’ (Wu and Kwok, 2007; Coakley, Hadass, &
Wood, 2008; Farinós, García, & Ibáñez, 2007; Autore, Bray, &
Peterson, 2009).
 Therefore, the better way to appraise present debt choice
decision is to investigate long run stock return
performance.

10.  Available empirical studies of long run value effects in
the emerging markets are limited in number, and
restricted to the study of equity issuances, particularly to
the study of initial public offerings (IPO).
 No study is found to uncover the long run value effect of
Islamic debt issuance in the emerging markets.
 Moreover, some recent methodological development are
yet to be implemented.

11.  The sources of wealth effects in Islamic debt financing
can be studied by examining the relationship between
firm characteristics and the wealth effects.
 The literature is scant and inconclusive on the
determinants of wealth effect of capital structure
changes (Masulis, 1983; Myers, 2001; Carpentier, 2006;
Rahim, Nor, Alias, & Yaakob, 2009).
 The capital structure theories such as the agency theory
may also explain long run value effect of firms’ financial
actions. The link between capital structure changes and
the actions of both the inside agents and the outside
parties is supported by many studies (Campello, 2006).

12. ↑ • AD ↑ but is mitigated by
debt covenants
Debt • AE ↓
Effect on
shareholder
wealth
Debt • AD ↓
• AE ↑ and lack of
↓ mitigating AE
However, very rare studies, if any, have used the agency theory to
explain the long run value effect of capital structure changes following
Islamic debt security issuance.

13. DV
• One, two, and three year buy and
hold abnormal returns (BHAR)
• Growth Opportunity (GO) [Myers, 1977; Jensen, 1986;
Frank & Goyal, 2009]
• Managerial Ownership (MO) [Jensen & Meckling, 1976;
Douglas, 2006]
IVs • Ownership Concentration (OC) [Lins, 2003; Earle et
al., 2005; Bena & Hanousek, 2008]
• Free Cash Flow (FCF) [Jensen, 1986; Opler & Titman, 1993;
Gangopadhyay & Yook, 2009]
Interaction • Capital structure change (CSCH)
13

14. 1) Growth opportunity (GO)
 The higher the GO the higher is the agency cost of debt
 lower performance
- -ve relationship with long run performance
2) Managerial ownership (MO)
 Firms with low MO have high agency cost of equity
(Jensen and Meckling, 1976) and they benefit more from
debt monitoring imposed by debt issuance
- - ve relationship with long run performance

15. 1) Ownership concentration (OC)
 OC can effect the conflict of interest between minority
shareholders and insider large shareholders’ (Earle et al.
2005; Lin, 2003)
- Debt can mitigate this type of agency cost
- +ve relationship with long run performance
2) Free cash flow (FCF)
 firms with high FCF have higher agency cost
- increase in debt can reduce the agency cost
- +ve relationship with long run performance

16. –
GO
–
MO
BHAR
OC +
FCF
+
CSCH

17. → Initial Sample: all bond issuances during January 2001 to October
2009
→ extracted from the Securities Commission Malaysia website.
→ comprises a total of 720 in one year performance sample, 675 in two year
performance sample, and 591 in three year performance sample.
→ Exclusions:
→ Conventional bonds
→ convertible issues
→ non-listed companies
→ banks and financial institutions
→ absence of Bursa Malaysia announcement
→ multiple issues during analysis period and on the same day
→ data unavailability
→ Final sample size:
→ 113 for one year sample
→ 101 for two year sample
→ 86 for three year sample
17

18. › Non-event firms that are very similar to the event firms
based on size and book-to-market are used as
benchmark firms (Barber and Lyon, 1997)
› The similarity is measured by Euclidean distances
between each of the issuers in the sample and the
benchmark candidates.
› For each sample firm, two closest firms matching firms
are used.
18

19. 
19

20. 
20

21. ¤ Growth Opportunity (GO)
¤ (Total Assets – Equity Capital + Market Capitalisation) / Total
Assets
¤ Managerial Ownership (MO)
¤ the percentage of total outstanding shares held by the executive
or managing directors of the debt issuing firm during the last year
before the issue
¤ Ownership Concentration (OC)
¤ Herfindahl Index which is calculated as the sum of the squared
percentage of shares held by the five largest shareholders
¤ Free Cash Flow (FCF)
¤ (operating income – current tax + change in deferred tax –
interest expense – preferred dividend – ordinary dividend)/net
tangible asset
21

22. 
22

23. ∆ Three models are tested for each of the one, two, and
three year analysis periods.
∆ Model 2 is formed by adding the interaction terms with Model 1.
∆ The final model is the restricted models derived from stepwise
omission of insignificant variables from Model 2.
∆ Heteroscedasticity test is conducted by Breusch-Pagan
test
∆ Heteroscedasticity robust standard error has been used to
correct the heteroscedasticity problem.
∆ Multicollinearity is tested by variance inflation factor.
∆ No significant multicollinearity problem is observed
23

24. Thsc
Analysis Sample Tbsa Jegadeesh and
BHAR tc
Period Size Lyon et al. (1999) Karceski
(2009)
1 Year 113 0.1073 1.91* 1.51 0.88
2 Year 101 0.1765 2.14** 2.77*** 1.68
3 Year 86 0.3725 2.90*** 1.61 2.43*
Thus, although not strongly supported by all statistical tests, the issuers
of Islamic debt experience significantly positive performance in two and
three year period following the issue.

25. 3 Year Sample
2 Year Sample 3 Year Sample
(Excl. Outl.)
Coeff. t-Stat Coeff. t-Stat Coeff. t-Stat
const. -0.1740 -1.58 -0.1766 -0.92 -0.0214 -0.20
CSCH 1.4101 2.18 ** 4.8276 2.24 ** 3.6676 1.96 **
GO 0.1000 2.73 ***
MO
OC
FCF
CSCH*GO -0.7877 -3.38 ***
CSCH*MO
CSCH*OC
CSCH*FCF -55.05 -2.55 ** -51.59 -2.39 **
No. of obs. 101 86 85
F-stat. 8.62*** 3.28** 2.95**
R-squared 0.0176 0.0865 0.1173
The model specification is based on the sequential elimination of insignificant variables from the model in equation 2. The
dependent variable is the in two and three years following the debt issue. CSCH is the capital structure change, GO is the
growth opportunity, MO is the managerial ownership, OC is the ownership concentration, and FCF is the free cash flow of the
debt issuer. *, **, and *** indicate 10%, 5%, and 1% level of significance, respectively. The t-ratios are based on
heteroscedasticity robust standard error as a remedy for the heteroscedasticity problem

26.  Debt issuers with high growth opportunity are found to
create significantly more wealth in two year period
o If capital structure does not increase, no increase of agency cost
of debt due to GO
o positive influence of the utilization of growth opportunities
o reduction of free cash flow problem
 Opposite effect of growth opportunity when the issue of
Islamic debt is associated with capital structure change
o growth opportunity increases agency costs of debt.

27.  Debt issuing firms with higher free cash flow and
increased leverage experience low performance in three
years.
o in Malaysia debt issuances do not induce performance by means
of limiting management’s discretionary use of free cash flow
o Zhang (2009), who provides evidence that debt and executive
stock options are substitutes in attenuating the free cash flow
problem of a firm.
o Most probably, Malaysian firms already control the agency costs
by employee stock option schemes (ESOS) (Ghazali, 2008;
Bacha, Zain, Rasid, & Mohamad, 2009).
o issuance of debt may result further increase of cash flow, which
may inflate the agency problem to result in a net effect of
negative performance

28.  