Influence of Shariah Compliance and Muslim Directorship on Stock Price Crash Risk in Malaysia

Ng, Yu Zhen (2025) Influence of Shariah Compliance and Muslim Directorship on Stock Price Crash Risk in Malaysia. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

Stock market plays a crucial role in fostering a country’s economic growth by providing a platform for buying and selling shares, which enables companies to raise capital and investors to earn returns, yet it also exposes participants to significant risks, particularly the risk of stock price crashes. This study investigates the influence of Shariah compliance and Muslim directorship on stock price crash risk (SPCR) in Malaysia, a nation with a well-established dual financial system incorporating both conventional and Islamic finance. Given Malaysia’s significant Muslim population and its robust Islamic capital market (ICM), this research provides insights into how Shariah-compliant practices may help mitigate the risk of sharp declines in stock prices. This study utilises a quantitative research approach, employing panel data from 100 non-financial firms listed on Bursa Malaysia over a period 2010 to 2023. The study applies the fixed effects model to examine the relationships between Shariah compliance, Muslim directorship and stock price crash risk. The sample firms encompasses both Shariah-compliant and non-Shariah-compliant firms, providing a comprehensive view of the impact of Shariah governance and ethical leadership on market stability. Based on the analyses, the findings reveal a significant negative relationship between Shariah compliance and SPCR, suggesting that Shariah-compliant firms exhibit stronger governance structures, transparency and ethical practices that help reduce the likelihood of stock price crashes. Furthermore, the presence of Muslim directors, whose decision-making is guided by Islamic principles of integrity and accountability, is shown to mitigate SPCR. This study contributes to the limited literature on religiosity’s influence on corporate governance, providing new insights into the role of Shariah compliance and Muslim directorship in enhancing market stability and investor confidence. Several important implications can be derived from this research. First, this research may provide useful guidance to policymakers in formulating regulatory frameworks and standards to promote Islamic finance and ethical governance practices that are less susceptible to SPCR such as enhancing the screening and monitoring processes for Shariah-compliant firms to ensure adherence to Islamic ethical standards as well as promoting the appointment of Muslim directors in Islamic-majority countries like Malaysia to foster ethical decision-making. Besides, public listed companies should reflect on their board composition and consider how directors’ religious values may influence corporate governance practices, risk management and corporate transparency. Lastly, this study may assist investors who are seeking stable, long-term returns to identify firms with strong religious adherence and ethical governance frameworks.