Common Risk Factors in the Return on Sukuk Investment

Transcription

1. Common Risk Factors in the Return on Sukuk Investment Md Hamid Uddin , PhD* Associate Professor of Finance Taylor’s University, Malaysia. Email: mdhamid.uddin@taylors.edu.my Mohammed Sawkat Hossain Researcher Taylor’s University, Malaysia. Email: sawkatfnbju@yahoo.com Sarkar Humayun Kabir, PhD Principal Lecturer in Finance Coventry University, United Kingdom. Email: ac5892@coventry.ac.uk * The correspondence should be sent to Md Hamid Uddin, emails: mdhamid.uddin@taylors.edu.my or iba_hu@yahoo.com. 1
2. Common Risk Factors in the Return on Sukuk Investment Abstract Sukuk , an Islamic replication of bond, has been in the market for nearly two decades, however, no fair valuation model of sukuk has been developed yet considering the risk drivers of sukuk. Instead, practitioners use LIBOR or Islamic interbank benchmark rate (IIBR) to determine sukuk return. In order to fill this gap, our study proposes a two factor sukuk pricing model and tested the model with weekly return of 627 Malaysian sukuk over a period of 7 years from 2010 to 2016. Malaysian data carry a special significance, because Malaysia is the global pioneer in the Islamic finance industry and continuously stays at the forefront of sukuk issuance and development of Islamic financial markets with more than 57 percent of the global sukuk market as on 2015 (IIFM, 2016; pp.43) Developing this model is important because sukuk is a distinct class of financial asset that is inherently different from a bond or an equity, and it is exposed to Shari’ah compliance risk. We identify and test two common risk factors for sukuk that need risk premium: (i) sukuk market risk and (ii) information asymmetry risk. The findings of this study have important implications for policy makers and the industry practitioners. Key Words: Sukuk pricing, Reference rate, Systematic risk factors, Two factor model. 1. Introduction Sukuk is a structured financial asset innovated as an Islamic alternative to debt security that has about USD367 billion of outstanding market value in 2016 (IIFM, 2017). Since its first introduction about two decades ago in Malaysian market, sukuk is now available globally in both Muslim and non-Muslim countries. Although the sukuk industry has been flourishing leaps and bounds across countries, market has been facing difficulties in pricing of this Islamic asset, as there is no appropriate reference rate of return. However, the industry practitioners usually compare sukuk yields with LIBOR in the absence of a suitable reference rate that captures the risks in sukuk investment. The mainstream Islamic theologists and jurists raise concerns about using an interest based benchmark to value sukuks because it is against the notions of Islamic best practices (Usmani, 1998, p. 118), while industry practitioners are also not fully convinced that LIBOR is the best benchmark for sukuk pricing as the underlying risk perimeters are different from the conventional assets (Ghauri, 1999; Opalesque, 2009; Jallad, 2015; SCM, 2016). Therefore, a group of Islamic banks and industry practitioners launch an Islamic interbank benchmark rate (IIBR1), which is a step forward towards benchmarking of Islamic assets. IIBR is structurally different from LIBOR, but it is an expected return on Islamic fund placements that inherently proxies for the time value of money. However, we need to know appropriate risk premium for a sukuk while determining its fair market price. To this 1 Details of IIBR is available at http://gifr.net/gifr2015/ch_12.pdf (accessed on November 11, 2017) 2
3. end , LIBOR or IIBR perhaps provide an estimation of the risk-free time value of money only, but the level of risk premium must be determined based on the non-diversifiable common risks of the sukuk. Considering the debate into account, our study attempts to identify the non-diversifiable risks involve in sukuk investments. To the best of our knowledge, no study has yet been determined these sukuk risk factors, which are required to develop a sukuk pricing model based on the asset pricing theory. This is important because a sukuk is not a bond per se, though it is structured to replicate a bond cashflow without breaching the Islamic principles of financial transactions that include an interest forbiddance, gambling avoidance, asset specification among others. Looking through contractual arrangements of sukuks currently available in the market, a sukuk certificate admits a proportionate ownership on the sukuk financed asset and provide a periodic return to sukuk holders from the earnings generated from the same asset based on the underlying Islamic financial contract of the sukuk. In contrast, bond issuers provide obligatory periodic coupons to the bondholders from their overall earnings rather than earnings from a bond financed assets. Therefore, these two financial assets are fundamentally different (Arif & Safari, 2012; Hossin, Uddin, & Kabir, 2017), and their risks parameter should also be different. This is because, apart from the above differences between these two assets, a sukuk is susceptible to the risk of breaching Islamic Shari’ah2 regulations that are not yet standardized across countries; while a debt based asset like bond does not have such Shari’ah risk. We also analyze that a sukuk cannot be like a common equity, because a sukuk provides a temporary ownership of an asset on the company balance sheet, whereas a common equity is a permanent ownership of the company itself and its holder has a residual claim on the corporate earnings. Therefore, it is also likely that sukuk risk drivers are different from those of the equity. Given that a sukuk is a different financial asset than a conventional bond or a corporate equity, we consider relying on market efficiency theory that sukuk investors know the most about the sukuk risks, which reflect in the market price of this asset. This means, we can track the common market risk of an individual sukuk from its sensitivity (beta) with the movements in the sukuk market. We assume that market knows more about the behavior of a sukuk if its price closely moves with the market than those which do not move closely. This means it is easier to value a sukuk with a beta around one (market beta) than the others, because the returns of 2 Islamic laws deriving from the divine book of Al-Quraan, sayings of prophet Muhamad PBUH (hadith), contextual judgements (ijmah), and opinions of Islamic theological scholars(quias). 3
4. these sukuks are mostly driven by the market movements . What determines the return of other sukuks not closely moving with the market is mostly unknown, hence, investors have more uncertainty to determine a fair price of these sukuks. In a nutshell, we observe an information asymmetric environment with respect to the sukuks trade on the market; investors know more about some sukuks than others. Based on this theoretical ground, we identify two nondiversifiable common risks that could determine the level of risk premium for a sukuk: sukuk market risk and information asymmetry risk. Having identified two sukuk common risk factors as above, we test them, using Fama and Macbeth (1973) method, if they require a risk premium. First, we run sukuk-by-sukuk timeseries regressions for sukuk excess return against the (i) market excess return and (ii) excess return of high information asymmetric portfolio minus low information asymmetric portfolio to estimate risk factor loadings (coefficients) for the market risk and information asymmetry risk. Next, we estimate week-by-week cross sectional regressions for sukuk returns against the factor loadings (coefficients from time-series models) to determine the risk premia for market risk and information asymmetry risk. While estimating the market excess return for time-series regressions, we apply industry index instead of a composite sukuk index, because Shari’ah requires the sukuk financed asset must be employed in a certain business project only; thus, it is likely that market effects on a sukuk are channeled through the industry in which the business project belongs. To calculate the excess return of high information asymmetric portfolio minus low information asymmetric portfolio, we first create a total of ten beta-sorted sukuk portfolios where the portfolio one and portfolio ten are two extreme portfolios having the lowest and the highest average beta values respectively; next, we determine the excess return by subtracting the return of portfolio ten from that of portfolio one. This is because, as opposed to the portfolio ten, the portfolio one has high information asymmetry as it is less correlated with the market. We test these two common sukuk risk factors in the context of Malaysian market, in which sukuk was first listed in 2000 and currently is the global market leader with 57 percent of the total global sukuk outstanding market values as of 2016 (Appendix A). Hence, the evidence from this market on the validity of two common sukuk risk factors as we identify above has a special significance for the industry practitioners. The test results for 627 sukuk-by-sukuk timeseries regressions show that the average coefficient for excess market return (loading for market risk factor) is 0.445, while that of the excess return for high minus low information asymmetry (loading for information asymmetry risk) is 0.226; both risk factor loadings are statistically significant at less than the five percent level. Thereby, this study documents that 4
5. movements in the sukuk market and the variations in information asymmetry for sukuks determine the return of sukuks . The findings from 377 week-by-week cross sectional regressions show that the average risk premia for common market risk is about 1.92% while that for common information asymmetry risk is 1.39%; both are statistically significant at the one percent level. The findings are consistent for all subsample tests across the sukuk types, issuer categories, and industry groups, which mean these two common sukuk risk factors are applicable irrespective of the characteristics of the sukuks. The findings of this study have a breakthrough academic contribution to Islamic finance literature. First, we identify two non-diversifiable common sukuk risk factors within the framework of the asset pricing theory. With our two-factor model, the analysts and practitioners can now assess the risk level of individual sukuk more accurately and determine its fair value. Second, the identification of two common sukuk risk factors would help analysts to provide sukuk ratings more accurately. Finally, this study will set a new research trend in Islamic finance that will add more depth to Islamic finance knowledge. This is important because most of the existing studies merely compare the Islamic assets with the conventional assets. The rest of the paper is organized as follows: in the next section, we give a thoughtful conceptual analysis on the sukuk features and their risk implications. The hypotheses are framed in Section 3. The two-factor sukuk pricing model are specified and discussed in Section 4. In the subsequent sections, the sample characteristics, empirical results and findings are described. The conclusion is given in the last section. 2. A Conceptual Analysis on Sukuk Pricing We provide a conceptual analysis on how a sukuk can be priced in the market that is yet to be known to address the research question of this study. This is important because the underlying contractual mechanism of sukuk is different from that of both the debt and equity securities; thus, an in-depth conceptual analysis is needed to better understand the drivers of sukuk risk factors that determine the market price of sukuk. We first discuss how a sukuk is different from a debt security and then analyze how it differentiates from an equity security in order to understand the nature of sukuk being a different class of financial asset. We then make efforts to conceptually understand if a sukuk can be priced based on the cash flow valuation framework. A sukuk is a structured financial instrument designed for corporate financing that provides a bond equivalent cash flow to the holders while maintaining the tenets of Islamic jurisprudence 5
6. for financial transactions , such as the prohibition of a fixed interest3 payment and investments in the illicit sectors4. A sukuk constitutes a lessor-lessee, buyer-seller or a partnership relationship between the sukuk holders and sukuk originator (henceforth issuer)5 subject to the types of sukuk contract6. Without regard to the types of contract, the sukuk holders are owners of the assets purchased by the sukuk issuer with the funds raised by sukuk issuance. Therefore, sukuk holders’ cash flow ideally originates from the earnings of sukuk underlying asset (DIFCSG, 2017; Meager, 2017; AAOIFI, 2008; ISRA 2011, pp.423; Hasan et al. 2013, pp.272; Ahmad et al. 2015; Safari et al. 2013; Ahmad and Hassan, 2007). On the other hand, irrespective of contract types, bond constitutes a lender-borrower relationship between the bond holders and issuer who own the assets purchased by bond issuance. Therefore, the sukuk and bond are different financial assets in terms of their underlying contracts: ownership vs. debt. However, if we look at the cashflow pattern and risk sources, the partnership based sukuks (e.g., mudarabah and musharakah contracts) are different from the non-partnership sukuks (e.g, ijarah and murabaha sukuks). In partnership sukuk, investors participate (through SPV) in a business venture with the sukuk issuer (the originator firm) by providing a capital contribution and share the profit-loss based on their capital contributions or at an agreed rate (Trad and Bhuyan, 2015; Saripudin et al. 2012.b). Hence, a fiduciary relationship emerges between the sukuk holders and issuer (Securities Commission Malaysia, 2009, pp.226; Rahman et al. 2014) that may lead to moral hazard problem (Zhang et al. 2016; Kolsi et al. 2014; Diamond, 1984). The reason is that the earnings of a sukuk holder (principal) under a partnership contract is subject to the best efforts and management ability of the issuer (agent) - as sukuk holders are the silent partners, and they 3 In Islam, a fixed interest generally refers to riba (as mentioned in holy book of Al-Quran: 2:275-276, 2:278, 3:130, 4:161; 30:39) that is an increment on the borrowing and lending of money which is paid or received in cash or otherwise above the loan amount. The riba (a fixed rate of interest) is made prohibited in any kind of financial transaction, because it may lead to exploitation on the borrower due to an unjustified or excessive charge (known as usury) on the borrowing that has also been condemned by the other faiths such as Hinduism, Buddhism, Judaism, and Christianity in addition to Islam (Visser & McIntosh, 1998). The Shar’iah board (the committee authorized to provide rulings on the Islamic laws and practices) identify the illicit sectors of economy in which an investment is prohibited. These include the sectors like alcohol, pork, gambling, entertainments (particularly the adult entertainments in all forms), weapon for mass destruction, tobacco and illegal drugs among many others. 4 A corporate firm or a government agency originates sukuk issuance through a Special Purpose Vehicle (SPV) – an entity created by the sukuk originator. On behalf of the originator, SPV issues sukuk certificates, operates as a trustee of funds raised and asset purchased, leases or sells back the asset to the sukuk originator/issuer on behalf of the holders of sukuk (for nonpartnership sukuks), enters into a partnership with the sukuk originating firm (the issuer) on behalf of the sukuk holders (for partnership sukuk), collects periodic rental payments and share of profits from the sukuk originator, and distributes them to the sukuk holders. 5 6 Such as ijarah sukuk (lease contract), murabaha sukuk (sales contract), mudarabah sukuk (partnership contract), musharakah sukuk (joint venture contract), wakalah sukuk (agency contract), istisna sukuk (working capital management contract), and salam sukuk (Islamic forward contract) are among others. A more detail discussion on the different types of sukuk contractual mechanism is given by Hossain, et. al. (2017). 6
7. cannot effectively penalize the issuer (agent/active partner) for a bad investment. In a nutshell, a partnership sukuk does not guarantee a profit payment and capital return (Zakaria et al. 2012; Hamzah, 2016; Alshamrani, 2014). Therefore, partnership sukuk is clearly different from a fixed income bond based on their cashflow certainty. It is also difficult to compare a partnership sukuk with a non-fixed income bond as the capital return is uncertain for partnership sukuk. On the other hand, a non-partnership sukuk may have prima-facie similarity with the fixed coupon mortgage bond as it has a fixed rental or installment schedule like a bond coupon and the sukuk holders’ ownership on the underlying asset serves as the collateral. However, the key difference here is that the mortgage bond holders retain a lien on the asset owned by the issuer whereas the sukuk holders directly own the asset. Therefore, the legal consequence for the bond and sukuk defaults would be different. Given the above analyses, we show that sukuk and bond are two different classes of financial assets; thus, their risk may not originate from the same sources as the contractual relationship between the security (sukuk or bond) holders and issuer is different. Moving to the discussion on equity and sukuk, equity holders being the owners of the company have the voting right and elect the board of directors of the company. They receive corporate dividend as a partial distribution of residual earnings of firm after the payment of interest and taxes. On the other hand, in the partnership sukuk contracts, the sukuk holders being the owners of a specific tangible asset share the profit and loss of a business activity in which the sukuk underlying asset is employed. In the non-partnership sukuk contracts, the sukuk holders receive either lease rentals or sales revenue in installments which are committed payment by the sukuk issuing company to the sukuk holders. Therefore, in both partnership and non-partnership sukuk contracts, a cash flow to sukuk holders cannot be equated with the corporate dividend. Given the nature of contracts of sukuks and equities, we find an agency conflict between the sukuk and equity holders that may happen in two ways. First, the equity holders being the owner of a corporation is the manager of sukuk underlying asset and the sukuk holders (in partnership contracts) being the silent business partner do not monitor the decisions of the corporation with respect to underlying asset of sukuk, and we do not know the recourse available for the sukuk holders if the asset is badly managed and cash flow is affected. Second, the corporation may exploit the tax-shield benefit of payments to sukuk holders. This happens because a sukuk underlying asset is owned by the sukuk holders7 but reported in the corporate 7 The sukuk holders fully own the asset in case of non-partnership contracts (e.g. Ijarah and Murabaha). However, they own a partial ownership in case of the partnership contracts (Mudarabah and Musharakah) 7
8. balance sheet as a company asset and the payments to the sukuk holders are reported in the income statement as a financing cost like an interest payment8 . Having analyzed the difference between the corporate equity and a sukuk, we conclude that the underlying risk drivers for these two securities should not be the same. 3. Hypotheses development Following the discussion above, we find that the sukuk is a financial asset that cannot be equated with the bond or equity because of its unique contractual mechanism. Therefore, it puzzles us how to value sukuk that needs to identify the common risk factors deriving sukuk returns. Theoretically, the bond yield is driven by the risk and term structure of the bond. The risk structure of a bond depends on the different risk factors such as default or credit risk, interest rate risk, liquidity risk among others (Baghai et al., 2014; Chance, 1990) while the term structure of risk depends on the changes in the expectation of short and long-term bond yields (Ang, Bekaert, & Wei, 2008; Campbell, & Viceira, 2005; Duffie & Singleton, 1999; Cox, Ingersoll, & Ross, 1985; Johnson, 1967). Given that a sukuk is a trust certificate recognizing the holder’s ownership on a particular tangible asset, we are not certain if the risk elements of a bond as mentioned above should also apply in case of a sukuk. In this regard, some researchers suggest a sukuk may be equated with a bond because it essentially creates a liability for the firm as a sukuk involves a series of periodic payments and commitment to buyback the asset at a fixed price on the maturity of sukuk contract (Ariff and Safari, 2012; Alam et al. 2013; Ahmed et al. 2014; Zakaria et al. 2013; Ulus, 2013; Trad and Bhuyan, 2015). This line of thought may imply that the bond risk elements may suffice for sukuk as well, but the material question is how the sukuk holders’ ownership - as opposed to the issuer’s ownership - on the underlying asset affects the liability and cost structure of a firm and the legal recourse to sukuk holders if the issuer defaults in making payments. Hence, we cannot make a firm conclusion that bond risk factors do indeed drive the sukuk market return. Likewise, we cannot find a strong reason to argue that the all equity risk factors such as market beta of the company, firm size premium, value premium, profitability premium, and investment patterns premium (Fama and French, 1993; 2015) can be used as the risk factors for sukuk. It happens because a sukuk is not a common stock that represents a perpetual ownership of the 8 The tax-shield benefit arising from the interest payment belongs to equity holders as the assets purchased with bond funding is owned by the corporate equity holders; whereas, they have no legal ownership, or has only a partial ownership, on the assets purchased with sukuk issuance. Therefore, if law allows a tax deductible on the sukuk payments, the benefits should be passed to the owners of sukuk asset but not to the corporate owners. 8
9. company and the holder of a stock is entitled to the residual corporate income after interest and taxes . In contrast to a common stock, a sukuk represents a limited period ownership (AAOIFI, 2010; SCM, 2014; Meager, 2017; Onder, 2016; Ahmad et al. 2015) of a particular tangible asset (reported in the company balance sheet) and the payments to the sukuk holder is not a residual payment like corporate dividend, and the accounting bodies (IFRS and AAOIFI) recognize it as a financial cost (like debt payments) before taxes payment in the income statement. If we review the individual equity risk factors, an equity beta determines the sensitivity of the price of a company stock with the overall market movement, but it is less likely that the price of a sukuk can also be sensitive to the overall equity market because a sukuk is rather structured like a synthetic debt and its holder does not have a stake in the corporate assets except the one purchased with sukuk issuance. It is also difficult to understand how the size, value, and profitability risk premium could be directly relevant for sukuk, as it is structured like a fixed term investment or trust certificate (SCM, 2009, pp.21; Zakaria et al.2012; McMillen, 2007; Mohamed et al. 2015). However, the investment pattern risk premium seems to have a relevance for sukuk risk because all sukuks do not necessarily to perform in the same pattern. The above analyses show that the risk factors of bonds and corporate equities may not have a direct implication for the sukuk risks, and identification of the risk drivers of sukuk remains a challenge for the researchers. However, based on the market efficiency theory, we can assume that investors do recognize the risks associated with the investment in sukuk being a unique financial asset and reflect their risk exposure in the market price of sukuk; but literature has not yet been advanced to guide us to determine the specific sukuk risk factors. Therefore, we first try to understand the risk and return behavior (Markowitz, 1954; 1959) of sukuk based on the classical asset pricing theory, which recommends that the level of a security’s market risk determines the degree of risk premium (Sharpe, 1964; Linter, 1965; Mossin, 1966; and Black, 1972). Set aside the academic criticisms and empirical limitations of market risk factor, we conjecture that the risk premium of sukuk could be driven by the degree of sensitivity of a sukuk with the sukuk market, but not with the equity or bond market. This is because sukuk entails a common Shari’ah risk in addition to any factor influencing the whole financial market. The common or systemic Shari’ah risk is an important concern for the sukuk investors for several reasons. For example, first, the religious scholars of the Shari’ah supervisory board (SSB) of different sukuk issuing company do not always provide an identical ruling on permissibility of the business or industrial sector in which the funds raised by a sukuk issuance 9
10. could be invested . The key implication here is that if the SSB of a new issuing company does not permit investment in a sector then it may have a systematic cascading effect on the existing sukuks belonging to that sector. Second, as Islamic theological researchers have been studying the business permissibility issues alongside the growth of Islamic finance industry, Shari’ah rulings are not always time-invariant and sometimes an existing Shari’ah compliant product may appear to be unlawful since Shari’ah governance of IFIs are yet to be standardized. Additionally, the members of SSB are not adequately competent to harmonize the religious rulings with modern financial landscape without infringing tenets of Islam. Hence, there could be a systemic effect across sukuk market if there is a change in the existing Shari’ah ruling or a sukuk contract appears to be unlawful9. These kinds of systemic Shari’ah risks may exist for other aspects of a sukuk indenture such as, the prohibition of (i) interest-type payments (riba), gambling (Qimar), information asymmetry/uncertainty (Gharar), lending-borrowing relationship, (ii) profit and loss sharing, and (iii) existence of tangible assets10. Hence, we construct the first hypothesis as follows HA: Sukuk return has a premium for the common risk factor spreading out from the movement in the sukuk market. The above hypothesis implies that we can estimate a ‘sukuk beta’ that captures the sensitivity of an individual sukuk price with respect to the changes in the average market price of all sukuks. However, an asset pricing model to estimate a security’s expected return based solely on the market movements is not appropriate as other common factors are involved (Ross, 1976; Reinganum,1981; Shanken, 1982; Connor and Korajczyk, 1988; Grinblatt and Titman, 1983; Camberlain and Rothschild, 1983; Bark,1991; Faff, 2003; Cooper, Connor, and Robert, 2008; Fama and French;1992, 1993, 2014). The earlier studies also find that low beta portfolios have higher average returns comparing with that of the high beta portfolios, which is an well documented systematic beta anomaly in the literature (Fama and MacBeth, 1973; Fama and French, 1992; Allen and Cleary, 1998; Frazzini and Pedersen, 2014). Given these findings on the asset pricing research, we attempt to find additional risk factors of sukuk in order for developing its pricing model. We assume that there exists a systematic beta anomaly for the sukuk returns based on the evidences of earlier studies. This could be possible because, investor 9 We have an example that supports our analysis: Dana Gas PJS, a company registered in the United Arab Emirates, fall in a legal deadlock with the sukuk holders when a local court declares two outstanding Dana Gas sukuks (worth USD700m) as unlawful because they appear to be not complying with Shari’ah laws. This incidence has occurred mainly due to the weakness of Shari’ah governance (Mollah and Zaman, 2015) as SSB supposed to certify that Islamic financial products are fully Shari’ah compliant before issuance, and ensure that company maintains Shari’ah guidelines in practice. Market observers find that the incidence shakes the global sukuk market as demand has dropped significantly following the event. See for details: https://www.ft.com/content/05913b66-6709-11e7-9a66-93fb352ba1fe (accessed on October 9, 2017). 10 More details about consistency problems in Shari’ah rulings (fatwas) available at Malkawi (2014) 10
11. may know more information about the return behavior of those sukuks which are more correlated with the sukuk market and has less information asymmetry as compared to those sukuks with less correlation with the market . This means a sukuk with a low beta is likely to be less correlated with the market and has high information asymmetry, and vice versa. The reasons of sukuk information asymmetry could be link to the contractual variations of sukuks, which may not be fully known to the uninformed investors. For example, in partnership sukuks, the cash flow to the sukuk holders come from the actual earnings of a particular real asset (in issuer’s balance sheet) that is being used in the business operation of issuer firm and the sukuk holders not being the equity owners have no access to the accounts of the issuer firm. Hence, the performance of the asset to which a sukuk is linked remains mostly unknown to the sukuk holders, but the level of information asymmetry may not be same for all sukuks as some issuer firms may disclose more information than others about the earnings from the sukuk underlying asset and all sukuk investors are not equally conversant about the operational dynamics of different types of sukuks. An information asymmetry may also exist in the non-partnership sukuks in which the sukuk holders’ cash flow is predetermined. This occurs because Shar’ah requires that the cash flow to sukuk holders ideally to generate from the actual earnings of the underlying real assets, but the sukuk investors do not know if that really happens in practice because a sukuk investor has no access to the issuer’s corporate accounts. This kind of information asymmetry would be lower for the sukuks that are highly correlated with market and whose beta is high, because a few studies find that the performance of securities having good corporate governance with adequate information disclosure are more foreseeable and likely to move in line with the market (Chahine and Zeidan, 2014; Sivaramakrishnan and Yu, 2008). In this circumstance, a sukuk investor generally is less likely to possess different information than the other investors as there is less information asymmetry. Following the same argument, conversely, the sukuks with a low market beta may have more information asymmetry and do not move well with the market, making price forecast more difficult. Therefore, we can argue that the sukuks with high information asymmetry require an information risk premium; hence, the low beta sukuks are likely to be underpriced relative to the sukuk security market line (SML). Similarly, the sukuks with less information asymmetry that move well with the market having a high market beta may be overpriced, as the general investors and fund managers may incline towards the high-beta sukuks if they want to get more expected excess return on their portfolios. The key issue here is that such a beta anomaly will 11
12. not resolve if the information asymmetry continues for the sukuks trading in the market, which means there should be a risk premium for the low-beta underpriced sukuks relative to that of the high-beta overpriced sukuks. Hence, we construct the second hypothesis as follows: HA: Sukuk return has a premium for the common risk factor due to the information asymmetry of the sukuks trade in the market. 4. Model Specifications In this section, we specify the test model of sukuk common risk factors as identified above. Based on the multi-factor asset pricing concept, we define the following model that captures (i) the sensitivity of a sukuk with its market and (ii) asymmetric sukuk information risk arising due to the systematic deviation of sukuk return from its market line.