The Effect of Reconstitution of Sharīʿah Compliant Index Announcement on Stock Turnover and Returns

This study determines the effect of announcements of re-composition of Islamic Index, commonly known as PSX-KMI All Share Islamic Index of Pakistan Stock Exchange, on the turnover and returns of included and excluded firms. This study is warranted because of the growing interest of individual and institutional investors in Shari'ah compliant stocks. The quantitative approach has been applied using secondary data of companies that are included and excluded due to re-constitution of PSX-KMI All Share Islamic Index surrounding four announcements. The Event Study approach is used to calculate abnormal turnover and abnormal returns surrounding the announcement period. In the second stage, regression analysis is conducted. The study finds insignificant impact of re-composition announcement of KMI-All Share Index on abnormal turnover and abnormal returns following inclusion and exclusion of companies. The underlying reason of insignificant evidence contradicts ethical screening theory followed by investors but can be attributed to non-standardization of stock screening criteria amongst asset management companies in Pakistan, mainly because of their Shari'ah scholars' interpretation of Islamic laws according to different schools of thought, hence the space of Shari'ah-compliant securities for trading & investment varies from one institutional investor to another. This study contributes to the body of knowledge related to market reaction on regulatory intervention (i.e., announcement reaction) and its impact on the prices and volumes of listed Shari'ah compliant stocks. As per the authors' best knowledge, this is the first empirical study examining the effect of announcements of re- composition of PSX-KMI All Share Islamic Index on the volume and price of included and excluded companies in Pakistan.