Firm's Growth and Sustainability: The Role of Institutional Investors in ...

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ScienceDirect Procedia Economics and Finance 35 (2016) 339 – 348

7th International Economics & Business Management Conference, 5th & 6th October 2015

Firm’s Growth and Sustainability: The Role of Institutional Investors in Mitigating the Default Risks of Sukuk and Conventional Bonds Noriza Mohd Saad a,*, Mohd Nizal Haniff b, Norli Ali b a

Universiti Tenaga Nasional, 26700 Muadzam Shah, Pahang, Malaysia b Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia

Abstract This study investigates the relationship of conventional bonds and sukuk’ yields spread to institutional investors using multivariate regression model. Secondary data was used for issuance (N= 212 of conventional bonds and 325 of sukuk) cover the 2000-2014 periods which are gathered from Bank Negara Info Bond Hub website. Though, data on issuer performance has been obtained from Bloomberg and Thompson Data Stream. The results revealed that monitoring role and voting rights decisions by owned large ownership of shareholding in the company have a relationship towards sukuk issuances in mitigating the default risks but not for conventional bonds. Overall, there are 6 variables statistically significant relationship with yields spread for conventional bonds compared to only 4 for sukuk. Implying that, sukuk issuance doesn’t have any significant relationship with the elements that involved “riba” for instance, volatility effects and inflation rate proxy by consumer price index (CPI) as recorded by conventional bonds. However, both types of issuances give a good signal for the firm’s sustainability growth performance at 99 percent significant level to mitigate the default risks with respect to yield spreads of sukuk and conventional bonds. © 2016 This is an open access article under the CC BY-NC-ND license © 2015 The TheAuthors. Authors.Published Publishedby byElsevier ElsevierB.V. B.V. (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-reviewed under responsibility of Universiti Tenaga Nasional. Peer-reviewed under responsibility of Universiti Tenaga Nasional Keywords: Institutional Investors; Default Risks; Sukuk ; Conventional Bonds

*

Corresponding author. Tel.: +609-4552046; fax: +609-4552020. E-mail address: [email protected]

2212-5671 © 2016 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).

Peer-reviewed under responsibility of Universiti Tenaga Nasional doi:10.1016/S2212-5671(16)00042-3

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Noriza Mohd Saad et al. / Procedia Economics and Finance 35 (2016) 339 – 348

1. Introduction Homer (1975) was claimed that origin of bond market is in 1550 whereby through the evolution, reformation and development in northern Europe of limited monarchies and semi democracies organized by standards of business ethics (the standard might be linking with the new term of corporate governance) for governments and investors. He argued that at all times social pressure is an essential support to any system of ethical standards, and an effective system of ethical standards is an essential precondition to a liquid capital market. Later, Reilly, Wright and Gentry (2009) traced to the late 1970s or early 1980s is the beginnings of the high yield bond market for a wide cross section of public companies to issue non-investment grade bonds. These public companies include the international and domestic markets have become more closely integrated in the latter half of the 1980s. The stability of the spread between euro and foreign dollar bond yields over US government bond yields is particularly noticeable (Benzie, 1992). Furthermore, in early 1980s to mid-1990s, many East-Asian and Southeast Asian countries embarked on policies of financial sector reforms, liberalization, deregulation and financial market developments. After that, by mid-1990s, most of these countries were enjoying the benefits of a liberalized financial market and an open economy. However, until recently, these countries lacked a well-established and wellfunctioning domestic bond market (Khalid, 2007). Tracing an early history of the capital market in Malaysia, especially beginnings of the bond market was started since pre-independence time, 1957. Malaysian Securities Commission (SC) as a one if not the only regulatory body that provided an acts, regulations, orders and guidelines to the parties involved in Malaysian capital market was highlighted that until the mid-1950s, issuance of domestic debt securities was fairly insignificant and occupied only a small segment of the financial industry. Khalid (2007) mentioned that capital market development in Malaysia started in 1960 with the trading in Kuala Lumpur of the dual listed stocks and bonds in Singapore. The real impetus came only when the ringgit was adopted in June 1973 as the Malaysian currency and Kuala Lumpur traded the shares in the local currency. Due to the banking system have already relatively well developed, provided much of the funding for domestic economic activity. In addition to conventional banking system, Islamic banking also correspondingly offers the funding. The Islamic Banking Act of 1983 was based on an acknowledgement of the aspirations of Muslims to have riba-free banking and investment services as well as the government’s goal of establishing a modern financial system in every aspect to Malaysia’s socio-economic goals for the 21st century economy correspondingly developed. Even though the banking sector offers more funding but the excessive funding required by public sectors make it the market demand and supply of funding are mismatched. As what was claimed by Hawkins (2002), the development of bond market is the impact on the banking system. Bonds have been increasingly supplementing bank lending as a source of finance for the private sector in emerging market economies. He also mentioned that bond markets could take business away from the banks. In the United States, bond market financing overtook borrowing from domestic banks long ago (Hawkins, 2002). It became pragmatism since most of the public listed firms are demand for huge capital in running projects development and business operation. Bond market offers them an opportunity to deal with sufficient number and amount of issuances whereby the banks untaken. Lingering effects of East Asian financial crisis in 1997, many public listed companies faced escalating difficulties as the plunge in share prices increased investor risk aversion and tight credit conditions severely affected financing lines at a time when liquidity was most urgently needed. The maturity mismatch was identified as a major source of systematic risk but then, Capital Market Masterplan (CMP1) was come out with a total of 152 recommendations include establishment of Malaysia as an international Islamic capital market center. This has reduced concentration and maturity mismatch risks as well as provides greater avenues for the financing of large scale projects (CMP2, SC, 2011). Considering to this scenario, SC was introduce Policies and Guidelines on Issue/Offer of Securities (Issues Guidelines) in July 1998 for additional capital-raising flexibilities. Besides, there are further action taken place by formation of the National Economic Recovery Plan (NERP) in 1998 highlighted the need for broad, deep and welldeveloped bond market that would provide a more stable source of financing which would also diversify the risks associated with cyclical economic bearish. The remainder of the paper is structured as follows. Section 2 includes a literature review by highlighted the yields spread as a proxy of default risks followed by the role of institutional investors and their relationship towards yields spread. Then, section 3 introduces the theories related to yields determinations; research methodology used and describes the data and variables for the study. The proposed methodology is applied in this section where the statistic is derived in this section to test the model hypotheses testing. Further, the results are discussed to show how


the model can be put to use by sukuk and conventional issuances in section 4. Finally, section 5 summarizes some conclusions and recommendations to policy makers. 2. Literature Review 2.1. Sukuk and Conventional Bonds’ Yields as a proxy of Default Risks Yields of sukuk and conventional bonds represent the similar meaning that is return or investment profit to bondholders and cost of capital to the issuers. Al-Nasser (2009) claimed that bonds are a proof of debt includes a fixed rate of interest regardless of return either profit or loss, while sukuk are a proof of ownership related to the original legal contract that governs the relationship between the sukuk issuer and sukukholders. In addition to that, bonds expire at their pre-agreed value, whereas sukuk expire at either their market value, a prearranged figure which is agreed upon by the two parties or at a fair value. Replicating of the bonds multifaceted by sukuk is breech of shariah rulings and prohibited. As four important points was highlighted by the Council of the Islamic Fiqh Academy in its sixth session held in Jeddah, Saudi Arabia from 14-20 march 1990, (1) Bonds issuance, purchase or negotiation undertaking to pay its amount along with an interest related to its face value or to a pre-determined profit are all prohibited in Shariah. The change in the nomenclature, such as calling bonds as a “certificate” or “investment securities” or “saving certificates” or renamed the interest to “profit” or “income” or “service charge” or “commission” has no effect on the aforesaid ruling. (2) The “zero coupons bonds” are also prohibited because they are loans sold at a price inferior to their face value and the owners of such bonds benefit from the price differential considering discounted bonds. (3) “Prize bonds” are also prohibited because they are loans in which a liability to pay a pre-determined profit or an additional amount is undertaken in favour of their bearers as a whole, or in favour of an undermined numbers of persons out of them. Moreover, these bonds have a resemblance with gambling (Qimar). (4) The interest bearing bonds can be substituted by the bonds and certificates issued on the basis of the contract of Mudharabah (profit and loss sharing) meant for a particular project or a particular enterprise, wherein no pre-determined profit or interest shall be paid to the bearers, but they shall be entitled to get a proportional share in the profit of the project in relation to the proportion of their respective investments. This profit cannot be given to them unless it has been actually yielded. However, in practice investment in sukuk actually does not show marked different to conventional bonds with regards to their yields. Computation of sukuk yields are the replicate of conventional bonds method or approach. It just a mimic of conventional bonds whereby sukuk features are replicating and mimic of conventional bonds (Lahsasna and Lin, 2012), identical and always has time to maturity, a coupon rate, and trades on the normal yield price relationships and similar or same features (Safari, Ariff & Mohamed, 2013); Ariff, Safari & Mohamed, 2013) in their late payment penalty upon default, trading of debt based sukuk, purchase undertaking in equity based structures and ownership status in asset based transactions (Lahsasna and Lin; 2012). Supported by Nanaeva and Mammadov (2010) also argued that sukuk shares some features with, and therefore often resembles, conventional bonds. But Sukuk has a different underlying structure and provision. The specific techniques and methods to make it different were highlighted by Abd. Sukor, Muhamad and Gunawa (2008) that the increasing interest among market players towards sukuk actually needed for establishing appropriate measure in recognizing and measuring transactions relating to the issuance and investment to ensure the trading compliant with shariah law. In addition to that, Zaidi (2007) stated the sukuk model is effectively a deviation of conventional securitization process where a special purpose vehicle acquire control of the originator’s real assets and issues financial claims on the associated cash flows. Evaluation and analysis of microeconomic data by RAM involved an element of interest rate, for instance as proxy by consumer price index is probably suitable to evaluate bond and not for sukuk by considering shariah principles compliant. Besides that, they also considered industry and company specific elements for instance; cash flow before the zakat deduction in financial statement of companies were taken as practiced by conventional bond rating appraisal, company’s liquidity position, its debt-maturity structure, robustness of cash reserves and other liquid assets as well as interest rate fluctuation exposure. Regards to this, an empirical study by Najeeb, Bacha, and Masih (2014) reported that there is no statistical significant evidence to indicate the local currency sukuk returns are correlated in the long-term and hence the held-to-maturity strategy of sukuk investors will not impede international portfolio diversification benefits. Furthermore, Nanaeva and Mammadov (2010) also suggested that sukuk return should be calculated using expected profit from project rather than based on market interest rate.

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Though, yield spread of sukuk actually less risky compared to conventional bonds (Ramasamy, Munisamy & Mohd Helmi, 2011) represented by little variation changes in macroeconomic risks (Ellis, 2012). However, instead of yield spread as a proxy to measure the default risk, Fathurahman and Fitriati (2013) used yield to maturity indicate that yield of sukuk greater than the average returns on conventional bonds as measured by standard deviation for the sukuk is relatively larger than the standard deviation of conventional bonds. 2.2. Role of Institutional Investors and link to Default Risks The influence of institutional investors who are purchased and held the corporate bonds and sukuk rather than individual investors might be a significant factor to yields determinations. As an institutional ownership, supposed they will actively and greater towards performance of defaults risk as measured by yields of bond and sukuk. Here, many researchers focused on the impact of corporate governance mechanisms on bonds yields performances for instances (Bhojraj and Sengupta, 2003; Mungniyati, 2009; Manconi, Massa and Yasuda, 2010; Liu and Jiraporn, 2010; T. Edmonds, E. Edmonds and Maher, 2011; Becker and Ivashina, 2012; Tran, 2014) and most of the study did not distinguished between conventional bonds and sukuk. Jensen & Meckling (1976) proposed a hybrid theory that the theory of ownership structure of firms by integrating elements from the theory of agency costs, the theory of property rights and the theory of finance. They argued that the concept of agency costs is the result of ‘separation and control’ issue connection throughout existence of debt and outside equity with dispersed ownership, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. Extended study on this separation and control by Fama & Jensen (1983) analyzed the survival of organization based on control, separation of decision and risk bearing functions done by minority ownership agents as an effective common approach to monitoring and controlling of firms decisions by implied agency problems. Although large investors can be effective in solving the agency problem, they may also inefficiently redistribute wealth from other investors to themselves. Concentrated ownership through large shareholdings, takeovers and bank finance is a nearly universal method of control that helps investors to get their initial capital plus profit margin (Shleifer & Vishny, 1996). Among this dispersed ownership with the separation and control decision, many of the researcher found that institutional investor are important party involved in influencing the bond performance, for instance; Bianchi & Enriques (2001) through their empirical analysis shows that institutional shareholdings and investment strategies are compatible whereby institutional investor can play a significant role in corporate governance of Italian listed companies. In addition to that, Bhojraj & Sengupta (2003) found that greater institutional ownership enjoy lower bond yields and higher ratings. Most issuer or companies ensure that their bond should be rated higher since it associated to diminutive chances to default. Inverse relation to bond yield whereby lower is better for them indicating the cost of capital incurred is low. They pointed out default risk can be reduce by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. Later, Weber (2006) stated that better governed firms of corporate governance received higher credit rating by investment grade otherwise poor governance lead to lower credit rating by speculative grade. Next, Qiu & Yu (2009) further investigate the influenced of the market for corporate control on the cost of debt. They were found that cost of debt (computed as the credit spread between comparable corporate and Treasury bonds) rose for firms rated speculative-grade and no effect for firms rated investment-grade. By reviewing the most recent studies, Claessens & Yurtoglu (2013) claimed that institutional investors are increasing throughout the world and their active role in corporate governance of firms is consequently becoming more important through financing accessibility, lower cost of capital, better performance and more favorable treatment of all stakeholders. Besides, Suchard, Pham & Zein (2012) used a sample of Australian large firms over 10 years to analyze the role of variation in firm-level corporate governance mechanisms in explaining a firm’s cost of capital. Their study indicate that, greater insider ownership, the presence of institutional blockholders and independent boards lead to lower cost of capital and subsequently higher firm value as proxy by Tobin’s Q . Similar finding with Cassell, Myers & Zhou (2013) highlighted that stronger monitoring mechanisms as represented by higher institutional ownership can reduced companies’ cost of capital. This study also was supported by Lim (2011) indicated the similar results by revealing a negative relationship between institutional ownership and cost of debt of Korean firms. On the other hand, Endri (2012) found that is no significant (significant) relationship between domestic (foreign) institutional ownership and bank shariah performance as measured by return on assets (ROA) and return on equity (ROE).


Growing dominance of equity holdings by institutional investors, both domestic and international, is casting a sharp focus on their activities and owners and monitors of firms. Thus, it become important indicators of corporate firm performance since it was reported that have a positive relationship between institutional ownership stability which is categories into pressure-insensitive and pressure-sensitive (Elyasiani & Jia, 2010). Furthermore, Zhang (1998) postulate that firms control by institutional investors lead to higher firm’s leverage. The result was supported by Abdul Wahab, How & Verhoeven (2008) in their study by selected debt as a proxy of leverage for control variables indicate a significant positive relationship with sensitive institutional investors whereas insignificant positive (negative) relationship with indeterminate and insensitive institutional investors. Kumar (2006) indicated that low institutional ownership tends to have lower capital structure (debt level) besides claimed that relationship between directors’ ownership and capital structure is statistically shown insignificant. However, Mungniyati (2009) reported that institutional ownership of 25 Indonesian companies with 38 bonds issued from 2005 until 2007 have significant (no significant) effects to bond ratings (yields). Then, Boubakri & Ghouma (2010) explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms found a strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) had a significant positive (negative) effect on bond yield-spread and bond ratings. The study also finds that higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings for financial firms when they are held and directly control the bonds. Inversely, bond yields reported by Manconi, Massa & Yasud (2010) increased during economic crisis (2007-2008) when corporate bonds held by institutional investors. Wang & Zhang (2009); Armstrong et al. (2010) pointed a strong support that institutional equity investors has a positive relation with firms’ cost of debt through their influence on information asymmetry condition of firms’ short-term bonds, lower ratings bond, higher leverage and higher volatilities. By concentration on two independent of information; i.e. uncertainty and asymmetry, Lu, Chen & Liao (2010) used American data from 2001 to 2006 to examine the effects of these independent variables on corporate bond yield spreads was found investors indict a significant risk premium for both independent variables when conniving for credit ratings. Furthermore, Elyasiani, Jia & Mao (2010) claimed stability of institutional ownership plays an important role in determining the cost of debt. They come out with three major results of their study; (i) there is a robust negative relationship between the cost of debt and institutional ownership stability, (ii) institutional ownership stability plays a bigger role in determining the cost of debt and (iii) institutional ownership stability affects the cost of debt to a greater extent for firms that are subject to more severe information asymmetry and greater agency costs of debt. Previously, Antoniou, Guney & Paudyal (2008) suggested that positive or negative association of debt ownership structure (proxies by ratio of debt to total debt, short term debt to total debt and long term debt to total debt) and firm specific factors (proxies by such growth opportunities, firm quality, earning volatility, firm size and many more) are depend on country’s financial and corporate governance in which they are operate. This relationship is statistically insignificant in Germany, which may suggest that agency conflicts and information asymmetries can be mitigated under German corporate governance system but inverse finding for UK firms. Hsueh & Liu (1992) scrutinized that in both settings either the bond rating downgrades or upgrades, there are significant response to stock prices movements with less information available in the market. Explicitly, the market anticipation of bond rating changes by the amount of information available in the market. That is, a rating change announcement conveys more information when there is high uncertainty in the market. At the firm level, the impact of rating change announcements is stronger with less information available in the market. Wittenberg-Moerman (2008) found that debt trading by public firms with available credit rating and profitable conditions are associated to lower bid-ask spreads whereas debt issued by institutional ownership are associated with higher information costs. Roberts & Yuan (Edward) (2010) reported that institutional ownership is negatively related to load spreads whereby the relationship become stronger for firms with higher degrees of information asymmetry. They also stated that Institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through effectively monitoring management. Further, institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt at high levels of concentration. Nonetheless, companies with institutional investors pay significantly lower borrowing costs than companies without institutional shareholders. Barry, Lepetit & Tarazi (2011) further investigated by analyzing institutional investors who hold higher equity stakes in the firms imposed with better performance represented by lower credit and default risk. As claimed by Qiu (2006), the presence of large Public Pension Fund shareholders as an institutional ownership reduces acquisitions activity after controlling for ownership endogeneity, firm-level governance structure and other firm characteristics

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make them perform relatively better in the long-run. Enhancement in mitigating the credit and default risks by the firms is important in order to ensure the performance is established. The concentration and monitoring on credit ratings posture a stimulating paradox whereby it is valuable, important and scant of informational value (Partnoy, 2001). Further, the author reported that ratings are correlated with actual default experience anyhow regardless of their informational value were not correlated with default. Reputational capital (as a trust factor in making decision enables parties involved reducing the costs of reaching agreement) and credit ratings are closely related. 3. Research Methodology and Data Collections Secondary data are gathered from Bondinfo Hub, Bank Negara Malaysia from 2000 to 2014 for 537 issuances. The data on institutional investors are hand collected from the top 30 shareholdings company’s annual report. Data on independent or explanatory variables are retrieved from Bloomberg Bursa Malaysia and Department of Statistic Malaysia. The existence of institutional ownership in the firm can influence the bond performance (Bianchi and Enriques, 2001). Empirical research provides evidence to support both; first, agency theory which is the most dominant theoretical perspective that has been widely used in previous studies (Jensen and Meckling, 1976; Fama and Jensen, 1983; Shleifer and Vishny, 1996; Kiel and Nicholson, 2003). Greater institutional ownership leads to lower bond yields and higher ratings (Zhang, 1998; Bhojraj and Sengupta, 2003; Elyasiani and Jia, 2010; Lim, 2011; Suchard, Pham and Zein, 2012; Endri, 2012; Becker and Ivashina, 2012; Claessens and Yurtoglu, 2013). Similar effects indicated by Abdul Wahab (2006) for the largest top-five institutional ownership. In line with the agency and ownership theorists as well as the aforementioned empirical evidence, hypothesis 1 and 2, in the alternate form, is suggested as follows: H1: Issuer with greater institutional ownership will have lower bond/sukuk yields spread than issuer with lesser institutional ownership. H2: Issuer with larger top-six institutional ownership will have lower bond/sukuk yields spread than issuer with lower top-five institutional ownership. For testing the relationship among these variables, it was discussed through considering the estimations models for the multivariate regressions analysis. This model is developing for both, conventional bonds and sukuk as shown as follows: YSpread i

Where;

D E1 ( IO61 ) E 2 ( IO2 ) E 3 (volatility 3 ) E 4 (Tenure4 ) E 5 (Tobin' sQ5 ) E 6 (CPI 6 )

E 7 (ln sizei7 ) E8 (ln GDP8 ) E 9 (ln firmsize9 ) E10 (ln growth10 ) E11(ln sustain11) H it

D = the constant term, E = the coefficient estimates of the explanatory variables, IOi = the institutional ownership of the companies, IO6i = the six largest institutional ownership of the companies,

Volatility i = the value of maximum minus with minimum YTM for each of issuances, Tenurei = the tenure of the issuance, Tobin' sQi = the value of Tobin’s Q of the companies, CPI i = the consumer price index of Bursa Malaysia,

LnSizeii = the log size of sukuk and bonds issuances in MYR, ln GDPi = the gross domestic product of Malaysian country, Lnfirmsizei = the log total assets of the companies, ln growthi

= the growth in capital of the companies,

= the sustainable growth rate of the companies, = the standard error of the ith sukuk.

ln sustaini Hi

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4. Results and Discussion 4.1. Results of Descriptive Statistics Table 1 revealed result of descriptive statistics for minimum, maximum, mean and standard deviation of conventional bonds and sukuk issuances by firm and its performance as control indicators. Amidst the period of studied (2000-2014), the minimum value of percentage institutional ownership 6 owned by conventional bonds and sukuk issuer indicated zero value respectively, meaning that there are no shareholding held by six main Malaysian institution, eg; Employee Pension Fund (EPF), Kumpulan Wang Angkatan Pekerja (KWAP), Tabung Lembaga Angkatan Tentera (LTAT), Permodalan Nasional Berhad (PNB), Pertubuhan Sosial (SOCSO) and Lembaga Tabung Haji (TH). However, the maximum an average value was dominated by conventional bonds issuer compared to sukuk issuer (83.84 and 16.72 as compared to 80.79 and 15.46 respectively). They are preferred to invest in that issuer who decided to issued corporate bonds in their capital structure instead of Islamic financing choices. Similar results reported by institutional ownership in total also indicated the highest percentage goes to the conventional bond issuer. There are among mutual funds, unit trusts, insurance companies and others excluding individual ownerships. As regards to yields spread, sukuk issuances shown a better performance than conventional bonds since mean value indicate lower than conventional at 1.77 and 1.85 respectively. Implying that, the risk to default among sukuk issuer is less risky (supported by value of standard deviation, conventional bonds = 1.29, sukuk = 1.24; low value is less risky) compared to firms who issue corporate bonds. Sukuk issuances also indicated low volatile represent less risky. Table 1. Results of minimum, maximum, mean and standard deviation for conventional bonds and sukuk, 2000-2014. Conventional Bonds N

Min

Sukuk

Max

Mean

Std. Dev

N

IO6

269

0.00

83.84

16.72

19.51

427

TotalIO

269

2.94

99.50

69.49

23.63

YSpread

269

0.02

7.33

1.85

1.29

Volatility

269

0.00

11.06

1.23

Tenure

269

1.00

60.00

7.49

TobinQ

269

0.51

4.72

CPI

269

95.70

lnsizei

269

0.74

lnGDP

269

lnfirmsize

269

lngrowth

Min

Max

Mean

Std. Dev

0.00

80.79

15.46

16.94

427

3.80

95.88

66.94

21.65

427

-0.52

18.06

1.77

1.24

1.66

427

-0.26

7.14

0.69

0.91

7.06

427

1.00

100.00

8.58

6.79

1.17

0.55

425

0.63

3.52

1.16

0.40

114.00

106.04

5.62

427

95.70

114.00

106.19

4.16

8.70

5.09

1.63

425

3.16

13.37

8.23

2.25

12.77

13.88

13.46

0.31

427

12.77

13.88

13.55

0.34

3.53

13.37

9.11

2.65

380

-0.76

4.46

1.98

0.78

223

-1.91

7.08

2.65

1.38

341

-2.11

5.83

2.57

0.93

lnsustain

253

-2.60

4.20

1.84

1.01

427

0.64

9.16

4.25

1.48

Valid N (listwise)

212

325

The maturity period of the bond or tenure indicate 100 years is the longest for sukuk and 60 years for the conventional bonds with average tenure of 8.58 and 7.49 years respective maturity periods maybe mitigate the default risks (standard deviation for sukuk = 6.79 is slightly lower than conventional bonds = 7.06). Tobin’s Q, consumer price index, log of gross domestic product and log of growth in capital does not seem much different between them. Otherwise, the size of issuance value (in Malaysian Ringgit, MYR) have been log due to thousand million figure issues by certain companies for instances, Projek Lebuhraya Utara-Selatan Berhad (PLUS Bhd) on 27-Dec-2007 for RM3,550 million and Public Bank Berhad on 5-Jun-2009 for RM5,000 million. Results reveal that in average sukuk issuances indicate higher volume, MYR8.23m as compared to conventional bonds, MYR5.09m. By analysing the value for log of sustainable growth, sukuk issuer are performed better in the business performance with mean = 4.25 as compared to conventional bonds with mean = 1.84.

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4.2. Results of Multivariate Regression In investigation the findings in table 2, a thorough multiple regressions analysis of the yields spread reveals that institutional ownership for both either for IO6 and total IO does not shown a significant value to model 1 for conventional bonds. Otherwise, total IO had shown a significant value at 10 percent confident level to model 2 for sukuk issuer. Role of institutional investor in monitoring and voting rights decision have a relation in mitigating the default risks for sukuk issuances but not in conventional issuances. By held a large portion of equity shareholdings in the company, they have an authority in investment decision. This is supported by Suchard, Pham & Zein (2012) and Cassell, Myers & Zhou (2013) by highlighted that stronger monitoring mechanisms as represented by higher institutional ownership can reduced companies’ cost of capital. This study also was supported by Lim (2011) indicated the similar results by revealing a negative relationship between institutional ownership and cost of debt of Korean firms. Volatility and consumer price index only had shown a positive (negative) significant relationship towards conventional bonds’ yields spread implying that the cost of debt by the issuer has an element of charging excessive interest rate (riba) and uncertainty elements which is prohibited under sukuk trading according to Islamic principles. Tenure of each issuance had shown a significant relationship for both conventional and sukuk yield at 5 percent and 1 percent respectively. Table 2. Results of multivariate regression for Model 1- conventional bond and Model 2- sukuk.

Model 1

Model 2

variables (Constant)

t 4.979

Sig. .000

t 4.382

Sig. .000

IO6

.258

.797

-.092

.927

TotalIO

.059

.953

-1.831

.068

Volatility

5.814

.000

.411

.681

Tenure

2.202

.029

4.321

.000

TobinQ

-1.531

.127

-.829

.408

CPI

-2.876

.004

1.277

.203

lnsizei

-2.908

.004

.908

.365

lnGDP

-2.329

.021

-3.762

.000

lnfirmsize

.343

.732

.776

.438

lngrowth

.145

.885

.231

.817

lnsustain

2.859

.005

-3.092

.002

R square F value

43.70%

19%

14.096***

6.683***

Evidently, statistical reports had shown a positive relationship which lead to longer period associate to higher cost of defaults and verse versa. Size of issuances has been log due to thousand million figure and results indicate that larger amount issues will be reduce the default risks for conventional bonds but insignificant to sukuk issuances. Gross domestic product and sustainability growth have a relationship with both issuances. However, firm size and growth in capital reported insignificant value to default risks. R-squared for model 1 and 2 are 43.7 percent and 19 percent respectively and therefore explaining a somewhat not strong relationship because less than 50 percent of the variation in firm’s yields spread is explained by the variation in the explanatory variables. F-statistics had shown significant value for the variables at 1 percent confident level meaning that the relationship was exists for both model equations.


5. Conclusion and Policy Implications Default risk among conventional bonds and sukuk issuer can be mitigating mainly by looking the impact of gross domestic product level to ensure the firm sustainability in the future. Besides the role of institutional investors in monitoring and voting rights in making investment decision have a significant relationship towards sukuk issuances in mitigating the default risks. Sukuk issuances in Malaysia also have some different factors in yields determinations whereby the prohibited elements are avoided otherwise conventional bonds ignore them. Muslim sukukholders should take into consideration when making an investment in bond to find halal status for their here and after life since yields is represent cost to the issuers but return of investment to them. 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