The Performance of Compliant Stocks during the COVID-19 Crisis

Proceedings of The 3rd International Conference on Advanced Research in Management, Business and Finance

Year: 2021


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The Performance of Compliant Stocks during the COVID-19 Crisis

Amel Farhat and Amal Hili



The outbreak of the COVID-19 pandemic and the associated lockdowns across the world led to a sharp decline in the market value of the global equity markets. The purpose of this paper i s to answer the following question: Do Compliant firms outperform the Non-Compliant during the COVID-19 pandemic? A compliant firm must satisfy the qualitative and quantitative criteria defined by Islamic law. Previous research focused on the performance of Compliant mutual funds, banks, and market indexes. Our paper stands out by sorting the cross-section of individual firms into Compliant and Non-Compliant firms and by analyzing the stock performance of each group during the COVID-19 crisis. Our empirical investigation is twofold: First, it includes quarterly cross-sectional regressions during the first two quarters of 2020. We show that the effect of firms’ compliance on abnormal returns is positive and significant during both quarters. Second, it uses difference-in-difference regressions of daily abnormal returns and volatility on the interaction between the Compliant dummy variable and Post-COVID dummy which equals 1 during the crisis period (February 24th to April 17th) and zero otherwise. We find that Compliant stocks outperform the non-Compliant peers during the pandemic. We highlight that this out-performance is not associated with higher firm-specific or total risk.

Keywords: Islamic finance, stock return, total risk, firm-specific risk, covid-19.