Hālal Investment Sensitivity to Cash Flow and the Effects of Capital Market Imperfections

Abstract

This paper examines the relationship between hālal investment sensitivity and cash flow,
as well as the impact of capital market imperfections on investment sensitivity in ṣukūk -dependent
companies versus conventional enterprises in six countries: Saudi Arabia, the United Arab Emirates,
Kuwait, Qatar, Bahrain, and Malaysia. The research is based on panel data from 240 non-financially
listed conventional and Islamic enterprises from 2018 to 2022. The study incorporates both analytical
and econometric approaches. Stationarity, co-integration, and multivariate Granger-Causality tests
are carried out using the estimated equations. The study finds that there are considerable distinctions
between ṣukūk -dependent firms and traditional enterprises. At the 5% significance level, both
groups' investment expenditures responded significantly to cash flow. But hālal investment rises by
$0.14 for ṣukūk -dependent companies, whereas conventional investment climbs by $0.17 for
conventional businesses when current cash flow rises by $1. Market capital imperfections, as
assessed by four factors, have a significant effect on hālal investment cash flow sensitivity. The
sensitivity of hālal investments to cash flows diminishes when fund flows, analyst following,
institutional ownership, and the corporate governance index increase. Finally, the Grnagel causality
tests confirm the study's alternative hypotheses. There is a bidirectional causal relationship between
hālal investment and cash flow, while there is a unidirectional relationship from capital market
imperfections to hālal investment-cash flow sensitivity.