The study examines determinants of price earnings (PE) multiples and their ability to forecast short term returns in the Egyptian stock market during the period from 2002 to 2007…
Abstract
The study examines determinants of price earnings (PE) multiples and their ability to forecast short term returns in the Egyptian stock market during the period from 2002 to 2007. Three factors were tested for their ability to determine the PE multiples. The three variables are growth, payout and return on equity (ROE) in the period from 2002 to 2005. Only Payout and ROE were found to be significant. The ability of past average PE multiples to explain and therefore forecast future short term returns were tested. Short term returns as measured by changes in stock prices from 2006 to 2007 were regressed against the past average PE multiples in the period from 2002 to 2005. The results indicate that the past high or low PE multiples give no insight on the direction and magnitude of future short returns. An important finding of the paper is that expectations about above average future growth can influence PE multiples more than the average past growth. This happens when the economy or some sectors of it are expected to witness far more growth than its past. It is therefore recommended for future studies that a quantitative or qualitative measure of future expectations should be included in the PE determinants formula in Egypt or countries expected to have very high or above average future growth in some of its sectors.
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– The purpose of this paper is to shed some light on the Egyptian stock market and its macroeconomic environment in the wake of the Arab Spring.
Abstract
Purpose
The purpose of this paper is to shed some light on the Egyptian stock market and its macroeconomic environment in the wake of the Arab Spring.
Design/methodology/approach
The paper examines whether the averages of the EGX30 index price changes in addition to key macroeconomic variables are statistically significant pre and post Arab Spring.
Findings
High inflation in the period up to the Arab Spring was a major contributing factor for the uprising. The solutions for the EGX30 index troubles are political and macroeconomic.
Originality/value
The variables examined pre and post Arab Spring are EGX30 returns, EGX30 total market value, US$ reserves kept at the Egyptian Central Bank, US$ to Egyptian pounds exchange, and inflation.
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Harit Satt and George Iatridis
This research aims to examine the relations between Shariah compliance and earnings quality.
Abstract
Purpose
This research aims to examine the relations between Shariah compliance and earnings quality.
Design/methodology/approach
The authors study three Shariah features: Shariah compliance status, level of Shariah compliance (H-Score) and Shariah compliance persistence. The sample consists of 463 firms from the Middle East and North Africa from 2011 to 2018. A variable determining the level of Shariah compliance was created in accordance with the methodology of S&P 500 Shariah and its underlying index, S&P 500. Then, a probate relapse study was created to identify the link between Shariah compliance and earnings quality.
Findings
Results show that Shariah-compliant firms engage in lower earnings management compared to their Shariah-non-compliant counterparts. This paper reveals that Shariah compliance status and high level of Shariah compliance have significant positive association with earnings quality. The authors also find novel evidence that persistence of the Shariah-compliant status has a significant negative association with earnings quality.
Practical implications
This study only examines firms listed on MENA stock markets. It is recommended to further study different markets in addition to the emerging Arab markets in order to compare and contrast the results. Further, larger sample observations from a greater date range can be used.
Originality/value
Few studies have examined the earnings management behavior of Shariah-compliant firms vs Shariah-non-compliant ones in emerging markets; however, no study has focused on Shariah-compliant firms and their level of Shariah compliance. To the best of our knowledge, this is the first study which uses all four proxies for earnings quality in association with Shariah compliance and used new Shariah variables such as Level of Shariah Compliance and Persistent Shariah Compliance status.
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The purpose of this paper is to examine what happens to the variance of individual stocks forming the Dow Jones Industrial Average (DJIA) allowing for aggregate uncertainty…
Abstract
Purpose
The purpose of this paper is to examine what happens to the variance of individual stocks forming the Dow Jones Industrial Average (DJIA) allowing for aggregate uncertainty measured by VIX, the “fear gauge index” of US options contracts. In examining each individual stock belonging to DJIA in 2011, the authors reconsider aggregate market uncertainty (VIX) as the mixing variable. In contrast to studies on the effects of VIX on the aggregate equity market, the data set used in this paper allow a further look at the proposition that market aggregate uncertainty should have varying impact on individual stock variance.
Design/methodology/approach
GARCH-M models estimate individual stock returns belonging to the DJIA in 2011 on its lags and on the ARCH-M term in the mean equation linking stock returns to the variance equation. The longest time span has 5,738 observations for most stocks under daily frequency from January 3, 1990 to December 30, 2011. The authors use one lag for the VIX2 term to address simultaneity problems in the variance equation. In order to allow for interactions between volatility and business cycles, the authors include a dummy variable for the three recessions identified by the NBER over the period.
Findings
Adding the “fear gauge” VIX index and a dummy variable for recessions to the variance equation in GARCH-M models, the VIX coefficient always increases variance and the recession dummy has mixed effects. Overall, VIX acts as expected as mixing variable. Supporting the mixture of distribution hypothesis, the impact of VIX is always positive (1.039 on market variance) and GARCH effects vanish completely for the index and almost as much for 24 stocks.
Research limitations/implications
In theory, the effects of VIX on stock variance should be positive and statistically significant, together with reductions of GARCH persistence. The authors find this to be the case for the aggregate stock market and for 24 out of its 29 DJIA stocks. The authors leave for further work extensions to estimating the variance equation for companies very exposed to idiosyncratic changes, such as oil price fluctuations or stock buybacks. The implication of this research for the academic or financial community relies on the estimation of VIX effects on individual stock variance, controlling for business cycles.
Originality/value
Due to its benchmark in equities, stocks in the Dow Jones Industrials make it a very interesting case study. This paper reconsiders the aggregate uncertainty hypothesis for two main reasons. First, the financial press and traders keep a very close track on the daily evolution of VIX. Second, recent research emphasizes the formal predictive power of VIX in US stock markets. For the variance equation, existing works report positive values for the VIX-coefficient on the S&P 500 index but they have not examined individual stocks as the authors do in this paper.
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Khemaies Bougatef and Imen Nejah
This paper aims to investigate whether the COVID-19 pandemic leads to the formation of herding behaviour among investors in Shariah-compliant stocks.
Abstract
Purpose
This paper aims to investigate whether the COVID-19 pandemic leads to the formation of herding behaviour among investors in Shariah-compliant stocks.
Design/methodology/approach
This study uses a sample of the stocks that constitute the Dow Jones Islamic Market Malaysia Titans 25 Index, over the period from 6 December 2017 to 12 March 2021.
Findings
This paper provides robust evidence on the contribution of the COVID-19 pandemic to the formation of herding behaviour in Shariah-compliant stocks. The findings also reveal that herding behaviour occurs only during falling market.
Research limitations/implications
The findings provide useful implications for policymakers and portfolio managers seeking to understand the behaviour of investors in Shariah-compliant stocks during turbulent periods. The presence of herding behaviour begs the question on the market efficiency and limits its potential to offer diversification benefits to investors. The findings suggest that policymakers and investors should mitigate misvaluations that occurred during the COVID-19 outbreak because the herding behaviour can drive stock prices away from their equilibrium values. Thus, regulators should adopt appropriate policies to enable the market to reach a more efficient level by monitoring and improving the quality of information and facilitate their transmission to the market. The misevaluation opportunity enables market timers to sell overpriced stocks and purchase underpriced stocks. The findings also imply that investors should implement effective hedging strategies to mitigate the downside risk. In addition, the results suggest that investors should devise their trading strategies in falling and rising markets during the COVID-19 pandemic.
Originality/value
There is meagre literature on the effect of the COVID-19 outbreak on the formation of herding behaviour among investors. Studies conducted on herd behaviour are widely focused on Shariah non-compliant stocks, only a few ones deal with Shariah-compliant stocks. The novelty of this paper consists in addressing this gap in the literature through examining the presence of herding behaviour on the part of investors in Shariah-compliant stocks in Malaysia before and after the COVID-19 outbreak.
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This paper aims to document the relative performance of non-financial shariah-compliant firms and non-financial non-shariah-compliant firms in the MENA (Morocco, Egypt, Saudi…
Abstract
Purpose
This paper aims to document the relative performance of non-financial shariah-compliant firms and non-financial non-shariah-compliant firms in the MENA (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain) region during the period between 2005 and 2009.
Design/methodology/approach
This paper uses pooled ordinary least squares regression analysis to document the effect of shariah compliance on stock price performance in the MENA region on a sample of non-financial firms that consists of shariah- and non-shariah-compliant firms.
Findings
Using market-adjusted returns as a proxy for performance, this paper shows that shariah-compliant firms underperform non-shariah-compliant firms. The results also show that underperformance of shariah-compliant firms holds in the civil law and in the common law countries. Interestingly, this paper also shows that difference between the performance of shariah-and non-shariah-compliant firms disappears during the crisis period.
Research limitations/implications
This paper argues that the characteristics of shariah-compliant firms are such that these firms are at a disadvantage relative to their non-shariah-compliant counterparts. For example, high leverage of their counterpart firms can act as a disciplining mechanism and positively affect performance of these firms. Similarly, high account receivables and high cash allow non-shariah-compliant firms to make more effective business networks than shariah-compliant firms and fund large capital expenditures. Consequently, shariah-compliant firms underperform non-shariah-compliant firms. This study’s results, however, should be read with caution, as they are mainly based upon the performance of large volume, statistical significance, sampling errors and possible labeling miss-specification. Further research on this topic with different research methodology is essential.
Originality/value
This paper takes a financial view rather than religious view while highlighting the impact of shariah characteristics on firm performance.
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David Mayes and Faisal Alqahtani
The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs), offer explanations and consider whether…
Abstract
Purpose
The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs), offer explanations and consider whether Sharia-compliance had a significant impact on the initial returns.
Design/methodology/approach
A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.
Findings
This paper finds that not only underpricing occurs but it is also among the highest levels in the world. While traditional factors affecting initial returns include age, market timing and firm size, it is found that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in IPOs.
Research limitations/implications
Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.
Practical implications
Very substantial sums are being “left on the table” and more efficient pricing of IPOs would be of considerable benefit to firms.
Social implications
By considering two different regimes, this paper offers some important lessons for the treatment of risk-taking, particularly in Islamic countries.
Originality/value
This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in the IPO market.
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Siew-Peng Lee, Mansor Isa and Noor Azryani Auzairy
The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in…
Abstract
Purpose
The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia.
Design/methodology/approach
The data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates.
Findings
The results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks.
Originality/value
This study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.
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Omar Farooq and Zakir Pashayev
This paper aims to document the information transmission capacity of Shariah-compliant firms.
Abstract
Purpose
This paper aims to document the information transmission capacity of Shariah-compliant firms.
Design/methodology/approach
The vector auto-regression (VAR) model is used to test the information transmission capacity of Shariah-compliant firms in India during the period between 2010 and 2015.
Findings
The findings show that the returns of non-Shariah-compliant firms lead the returns of Shariah-compliant firms. It is argued that non-Shariah-compliant firms possess certain financial characteristics (higher leverage, higher accounts receivable and higher cash holdings) that make their information environment better than information environment of Shariah-compliant firms. The authors argue that superior information environment leads to timely incorporation of market-wide information, thereby causing the returns of non-Shariah-compliant firms to lead the returns of Shariah-compliant firms. It is also shown that the result holds in various market conditions.
Originality/value
It is believed that prior literature does not adequately address the information transmission capacity of the stock prices of Shariah-compliant firms. The gap is filled by documenting that stock prices of Shariah-compliant firms that are more informative than stock prices of non-Shariah-compliant firms.
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Soon Nel and Niël le Roux
This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based composite…
Abstract
Purpose
This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based composite multiples models produce more accurate equity valuations than optimal equity-based, single-factor multiples models.
Design/methodology/approach
This study applied principal component regression and various mathematical optimisation methods to test the valuation precision of equity-based composite multiples models vis-à-vis equity-based, single-factor multiples models.
Findings
The findings confirmed that equity-based composite multiples models consistently produced valuations that were substantially more accurate than those of single-factor multiples models for the period between 2001 and 2010. The research results indicated that composite models produced up to 67 per cent more accurate valuations than single-factor multiples models for the period between 2001 and 2010, which represents a substantial gain in valuation precision.
Research implications
The evidence, therefore, suggests that equity-based composite modelling may offer substantial gains in valuation precision over single-factor multiples modelling.
Practical implications
In light of the fact that analysts’ reports typically contain various different multiples, it seems prudent to consider the inclusion of composite models as a more accurate alternative.
Originality/value
This study adds to the existing body of knowledge on the multiples-based approach to equity valuations by presenting composite modelling as a more accurate alternative to the conventional single-factor, multiples-based modelling approach.