The Impact of Islamic Debt on Company Value

This study uses micro-econometric analysis to examine the impact of Islamic debt on firm value and firm financial performance by observing Malaysian firms. A number of significant contributions to corporate finance arise from this research in relation to Islamic debt instruments and firm financial performance. First, it provides evidence of the Islamic debt impact on firm value and firm financial performance. Second, and very importantly it provides new insights, adding substantially to the very few studies that have been conducted on these types of instruments. The choice of model employed is specified according to its diagnostic testing results for nonnormality, heteroskedasticity, multicollinearity, endogeneity and linearity in. A test is conducted to confirm that there are no outliers in the data set prior to the diagnostic testing. Poolability and co-integration testing are also included. Based on the diagnostic results, data are analysed using the dynamic panel generalised method of moment (GMM using a quarterly balanced panel of 80 Malaysian firms issuing Islamic debt which spans from 2000 to 2009. This method is employed to investigate the impact of Islamic debt issues on firm value and/or firm financial performance. The result reveals that Islamic debt has a significant positive impact on company value and firm financial performance. It also confirms that trade-off theory holds well in the Malaysian context for Islamic debt financing. Furthermore, the coefficient for Islamic debt is higher than the coefficient for non-Islamic debt, suggesting that the Islamic debt provides a higher contribution to firm value and to the improvement of firms’ financial performance compared to non-Islamic debt. © Authors