How Informative Are Stock Prices of Islamic Banks?

Abstract

Using a sample of 2,210 observations for 170 banks operating in 12 countries with dual banking systems over 2006-2017 period, we find that Islamic banks have lower stock return non-synchronicity, lower illiquidity ratio, and their current returns have lower future earnings prediction ability than conventional banks. Hence Islamic banks have less information content in stock prices than conventional banks that can be due to their lower degree of transparency mandated by their financial paradigm. This suggests that for Islamic banks, market discipline may not be as effective as it is for conventional banks and hence they require more direct supervision. Our findings have important implications for policy-makers and investors.

Keywords: Stock Return Non-Synchronicity; Islamic Banking; Stock Illiquidity; Future Earnings Prediction Ability

JEL Classification: G12, G14, G21, G30, M41