Does Shariah compliance affect investor behaviour in the COVID-19 times: evidence from herding in the global energy market

ABSTRACT

This paper investigates whether the Shariah compliance matters in determining investor behaviour in herding across firms in the global energy market. Our sample comprises 2501 globally listed energy equities from 10 April 2019 to 8 April 2020 from the Refinitv Eikon database, which also flags firms as compliant or otherwise with Shariah or Islamic law. Using closing price data for the selected firms, we analyse herding behaviour across the two groups, in addition to various firm and market characteristics such as size, profitability, analyst recommendations about future performance and up and down market days. Our results suggest herding in both Shariah and non-Shariah-compliant energy firms, and on down market days in particular. Cross-sectional tests indicate higher herding in larger and more-profitable Shariah firms, and those with positive analyst forecasts for the future, which is consistent with pressure-driven behaviour to maintain performance. In particular, we find that the COVID-19 pandemic does not significantly alter herding behaviour for the sample firms.

KEYWORDS:

• COVID-19
• herding
• shariah compliance
• energy market

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Style-investing (also known as characteristic trading) refers to investment decisions which are driven by specific stock characteristics such as price-to-earnings ratio, performance, size, sector, thus it leads to various ‘investment styles’ (e.g. diversified equities, index tracking, momentum, growth, value). Therefore, firms with similar characteristics such as size and profitability may tend to stick together as a group.