Master of Science in Islamic Banking & Finance


Department of Finance

Faculty/ School

Faculty of Business Administration (FBA)

Date of Submission

Spring 2021


Dr. Saqib Sharif, Associate Professor, Department of Finance, Institute of Business Administration (IBA), Karachi


Since the perseverance of Islamic finance is to achieve Maqasid al-Shari'ah, which focuses on the wellbeing of humanity, any company which is Shari’ah compliant should have trustworthiness as a basic peculiarity of management. On the other side, studies have also discovered a positive relationship between trust and investors’ perception and application of financial disclosure, precisely in case of earning announcements made by firms. By keeping the proclamations of trustworthiness of the Islamic financial system and the positive relationship between stock market reaction and earning announcement of trustworthy firms in consideration, this study aims to empirically test the presence of trust in the Islamic listed firms in Pakistan.

This research hypothesized that whenever any Shari’ah compliant company makes annual earnings announcements, the market should respond to it through changes in security price and volume. The research question has been examined on Pakistan Stock Exchange (PSX) listed firms, for all the annual corporate earnings announcements during the period from July 1, 2019, to June 30, 2020. Abnormal Return Variance (ARV) and Abnormal Trading Volume (ATV) are used as proxies to measure the investors’ reaction following the earnings announcement. Firm level controls have also been included in the model to test whether the trusted firms have a significantly higher market reaction or not? The results suggest that stock prices around the earning announcements are negatively related to the trustworthiness of the firms compared to less-trusted firms (i.e., non-Shari’ah compliant companies). On the other hand, for abnormal trading volume (another proxy of market reaction), trustworthy firms show insignificant market reaction followed by earning announcements; that is, traders perceive/react to annual earnings announcements for both types of companies in a similar way.

However, these results are contrasting with few prior research, but the findings present an atypical phenomenon that investors considering managers of Shari’ah compliant firms as honest and transparent, so they have less demand of information and give less consideration to earning announcement, hence investors’ reaction to earning announcements get subdued.

This research has made a valuable contribution to the literature by providing the guideline that how investors’ reaction to Shari’ah compliant firms differ from non-Shari’ah firms; as well as by indicating that how religious element may subdue other social factors, like trust. This study has also explored the market reaction by employing both liquidity and volatility in Pakistan.

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