The Impact of Shariah Non-Compliant Risk on Stock Return in Malaysia

This study investigates the relationship between Shariah non-compliant risk and stock returns in Malaysia between 2018 and 2020. The findings demonstrate a significant positive relationship between Shariah non-compliant risk and stock returns. The study revealed that in the long run, investors prioritize higher returns over the Shariah compliance of a firm despite the higher risk associated with non-compliant stocks. This finding aligns with the conventional theory of finance, which suggests that higher risk leads to higher returns. On a positive note, the lower returns associated with Shariah-compliant stocks provide some indication that Shariah-compliant stocks are exposed to lower risk and are a more stable investment. The findings of this study offer valuable insights for investors seeking to invest in Shariah-compliant financial products and businesses. This research contributes to the literature on the relationship between Shariah non-compliant risk and stock returns in Malaysia and offers useful implications for policymakers and investors alike.