Is Being Sharia compliant worth it?

Summary We investigate the effect of Sharia compliance on stock valuations. To this end, we examine the price effects of additions to and deletions from the Dow Jones Islamic Market Index (DJIMI). Using the event study methodology, we measure abnormal returns for companies from Muslim countries and the US over the period of 2000 to 2017. We find that additions to the Islamic index lead to a positive stock market reaction in Muslim countries but a negative reaction in the US. Conversely, deletions from the Islamic index generate a negative stock market reaction but a positive one in the US. The differing valuation effects can be explained by different perceptions of investors. In Muslim countries, investors have a positive perception of the Sharia compliance because of religious beliefs, while in the US they negatively react because of a negative perception of Islam and of the restrictions associated with Sharia compliance.