Dow Jones Islamic Index firms: how profitable are they?

Purpose - The purpose of this paper is to examine the operating performance of Dow Jones Islamic Index (DJII) firms vs non-DJII firms. It also explores the impact of the 2007-2008 financial crisis on the operating performance of firms included under DJII relative to a comparable set of firms (i.e. industry-size matched) that are not included in the DJII. Design/methodology/approach - The final sample consisted of 1,128 unique firms (or 5,669 observations) in the DJII sample and 9,501 unique firms (or 55,889 observations) in the non-DJII sample. The paper uses a unique dataset from S&P's Compustat North America database during the period of 2005-2014. This study uses univariate tests complemented with multivariate regression analysis to gain further insight into the influence of Shariah compliance on the operating performance of firms during the crisis. Findings - The paper shows that DJII firms were more profitable than non-DJII firms during the sample period. In addition, DJJI firms' profitability was not affected as much during the financial crisis as non-DJII firms. This finding is robust to various model specifications and to alternative definitions of operating profitability. Research limitations/implications - Corporate governance and managerial characteristics and the possible effects of these on operational performance are not considered herein. Practical implications - Investors and fund managers could benefit from investing in Islamicly permissible equity funds when constructing investment portfolios in regard to asset allocation and policy responses to financial crises. Originality/value - The present paper uses a unique sample and timeframe to show that the characteristics that makes a firm Shariah-compliant also leads to much higher operating profitability and reduces the impact of the financial crisis on firm profitability.