The impact of Shariah compliance on firm's performance and risk

Abstract This study investigates the performance and risk of compliant stocks at the firm level, where compliance is determined by satisfying two screening stages outlined by Islamic law. Our empirical analysis employs quarterly cross‐sectional regressions, assessing how compliance influences both performance and risk using a combination of market‐based and accounting‐based metrics. Our results consistently reveal that compliant stocks exhibit significantly superior performance and lower risk compared to their conventional counterparts. These results remain robust across different business cycles and study periods. Our findings hold after accounting for different control variables known in finance literature to affect the cross‐section of stock returns.