The dynamic effect of participation ındex on the stable firm dynamics: evidence from non-financial firms from Türkiye

Purpose This study aims to examine whether the inclusion of firms in the participation index provides sustainability according to firm growth and financial leverage within the Islamic finance principles framework by using the Local Projections method for Turkish nonfinancial firms. Design/methodology/approach The authors use the semiparametric local projections method which allow us to make dynamic panel impulse-response analysis. At the same time, the data set the authors use is a hand collected data set. In this framework, the authors investigate the impact of inclusion in the participation index for two quarters on the firm dynamics of Turkish nonfinancial firms using the local projections methodology. Findings The results suggest that firms included in the index for at least two quarters experience more stable growth and significantly lower leverage, while short-term inclusion yields weaker effects. These findings suggest that prolonged compliance with Islamic financial standards strengthens internal financing capacity and shields firms from debt exposure. The study contributes to Islamic finance theory by incorporating time-varying Shariah compliance and offers practical implications for financial regulation and firm governance. Practical implications This study highlights the impact of Islamic finance on firm growth, and stability, indicates its potential to decrease dependence of debt, support sustainable growth and increase economic resilience through its principles and practices. For high-value businesses to benefit from the Islamic finance principles, policymakers can create opportunities to reduce reliance on debt and increase liquid assets by aligning financial structures with Shariah standards. Originality/value To the best of the authors’ knowledge, this is the first study in the emerging markets Islamic finance context that uses a time-varying participation index approach in its empirical analysis and sheds new light on this relationship in the literature.