Impact of Ownership Structure on Investment Efficiency of Sharia Compliant Firms

Abstract

Sharia compliance is very common preference among Muslim nations of world, requiring to meet certain criteria as a sharia compliant firm. Muslims prefer to either invest in stocks or buy products from firms that are working as per the sharia rules and does not contribute in non-sharia activities in the society. This research is conducted, focusing on sharia compliant firms’ ownership structure and impact on firm’s investment efficiency. The workable data comprises of 65 non-financial sharia compliant firms listed in Islamic index of Bursa Malaysia and the span of study was 10 years from 2011 to 2020. Panel data analysis using two-step System Generalized Method of Moments technique was used in the study. The results showed that ownership concentration has a direct positive relationship with investment inefficiency while dispersed shareholdings displayed a negative relationship. Managerial shareholdings proved to have a positive relation with investment inefficiency as in line with agency theory. Institutional ownership was found to be negatively related to investment inefficiency while Mutual Fund ownership and Retail ownership were found to increase investment inefficiencies. Impact of Independent Non-Executive Ownership in firm was found to be statistically insignificant in impacting the investment efficiencies. The findings are in line with previous studies conducted on conventional non-financial institutions. Furthermore, the study could be further enhanced through inclusion of owner’s activism and cash flow rights.