Leverage Risk, Financial Crisis, and Stock Returns: A Comparison Among Islamic, Conventional, and Socially Responsible Stocks
According to the financial press, firms with low leverage have lower distress risk due to their reduced exposure to the credit market, especially during credit crises. Compared to their conventional and socially responsible (SRI) counterparts, Shariah compliant (SC) stocks are low-leverage stocks. Our hypothesis is that SC firms would be less sensitive to leverage risk and thus would be ideal for wealth preservation during declining market environment.