The Impact of Financial Measures, Earnings Management, and Sukuk Structure on Sukuk Rating

Abstract

The impact on sukuk rating imposed by the financial measures, earnings management, and the sukuk structure has been considered by this research study by taking the sample from Pakistan. Financial measures, earnings management, and sukuk structure are the independent variables whereas the sukuk rating is taken as the dependent variable. Financial measures include financial leverage, profitability and issue size; earnings management include the return on assets, firm size and firm age and the sukuk structures undertaken are the musharakah, mudarabah, murabahah and ijarah. This study is conducted on the Pakistani firms that have issued sukuk. Correlation and regression model has been applied. Annual reports of all those firms that issue sukuk which are listed on the rating agency i.e. Pakistan Credit Rating Agency has been taken which has been subject to numerous selection standards. It has been postulated that financial measures, earnings management and sukuk structure have significant influence on sukuk rating and these significant influences have been confirmed by the results of the study. The data has been taken for the period of 2011 to 2015. Ordered logit regression model has been used in this study. Financial measures indicator that is financial leverage has positive influence on sukuk rating whereas profitability and also size of issue i.e. issue size have negative influence on sukuk rating. The indicators of earnings management that are return on assets, firm size and firm age have negative influence on the sukuk rating. Sukuk structure is found to have negative influence on sukuk rating. This study can be further continued by researchers with behavioural finance variables and by keeping control on to the financial measures, earnings management and sukuk structure; sukuk ratings can be improved which would persuade investors to invest in sukuks in Pakistan.