Distance to Default of Malaysian Corporate Sukuk Issuers: The Role of Corporate Governance and Corporate Social Sustainability

Awais ur, Rehman (2021) Distance to Default of Malaysian Corporate Sukuk Issuers: The Role of Corporate Governance and Corporate Social Sustainability. PhD thesis, Universiti Malaysia Sarawak.

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Abstract

Malaysia has emerged as global hub for sukuk. However, the Malaysian sukuk market has undergone many defaults and face massive competitive pressure. Distressed by the defaults, the sukuk issuances went downwards and are still unable to increase to the previous level. Defaults are contagious and difficult to be managed after their eruption. In this scenario, the financial health and stability of sukuk issuers must be analysed and the precautionary tools to mitigate the default risk must be explored. Hence, this study was aimed to analyse the distance to default (DD) of sukuk issuers listed on Bursa Malaysia. it also analysed the impact of corporate governance (CG) and corporate social sustainability (CS) on DD to investigate the mitigating effect of these variables. Moreover, the mediating role of CS was also analysed. Conceptual framework ⁁of this study was grounded on agency theory and stakeholder theory. DD was calculated using Bharath and Shumway naïve model, since this model uses accounting and market data as well. CG was measured on its aspects of board composition and audit quality while the CS was calculated by ⁁using the framework of Global Reporting Initiative. The data was taken from 33 sukuk issuing corporations listed on Bursa Malaysia from 2011 to 2017 that yielded the sample size of 231 observations. The GMM technique was used for model estimation. The results showed that sukuk issuers related to communication, logistics and industrial goods had the biggest DD and hence the lowest credit risk while property and energy sectors were at the highest risk of default. GMM regression demonstrated that CG variables were showing different impact on CS and DD, but overall CG exhibited a positive impact on CS and DD. While all the CS pillars, namely the economic, social and environmental CS showed positive impact on DD. Moreover, it was noted that CS mediates the relationship between CG and DD. The results were robust across alternative measures and against different iv econometric tests. Under the policy implications, this study suggests Bursa Malaysia to implement CG according to market norms and the female directors serving at the board must be empowered due to their positive impact on DD and CS. The study has rendered important empirical evidence for the determinants of DD of Malaysian sukuk issuers This study analyzed DD of sukuk issuers built on the theoretical framework of agency and stakeholder theory and It was noted that none of these theories are sufficient to fully explain the empirical results and hence need rectifications. Sukuk issuance is a newer phenomenon than bonds and henceforth has lesser studies on it. In this context, this study, to a certain degree, has contributed to the current literature by analyzing the default risk of sukuk issuers and the role of CG and CS in this regard.

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