Market Reaction of Stocks Included-In And Removed-From Shariah Index: The Case of Kuala Lumpur Shariah Index

Since Bursa Malaysia launched Kuala Lumpur Shariah Index (KLSI) in April 1999, more than 70% of firms listed in Bursa Malaysia also listed in KLSI. As many companies listed in KLSI do not owned by Muslim, the phenomenon generates question on whether companies will get the ad-vantages from being listed in KLSI. This study is aimed at providing empirical evidence on whether the announcement of stocks included-in and removed-from KLSI has the information content and thus will be reacted by market as reflected in average abnormal return (AAR). Furthermore, this study will get into insight on whether market behaves differently to stocks included-in and removed-from KLSI. Using data from KLSI from 1999 through 2005, the results show that, on announcement day, AAR is found statistically positive and significant different from zero (AAR = 0.288%; t-statistic = 1.926) for stocks included-in, while statistically negative and significant different from zero (AAR = 0.660%; t = -2.857) for stocks removed-from KLSI. This implies that investors posi-tively (negatively) react to the stocks included-in (removed-from) KLSI as these firms are perceived as Shariah compliance (non-Shariah compliance) judge by Shariah Advisory Council (SAC). This study also show that CAR for stocks included-in is higher than stocks removed-from KLSI on days before and after announcement date