Influence of Shariah compliance and Muslim directorship on stock price crash risk

Purpose The purpose of the research is to analyze the effect of Shariah compliance and Muslim directorship on stock price crash risk (SPCR). Design/methodology/approach Drawing on the data of 1,400 firm-year observations of 100 firms listed on Bursa Malaysia for the period 2010–2023, this research uses the fixed effects estimation method for regression analysis. Findings The findings demonstrate that Shariah compliance has a negative relationship with SPCR, especially when proxied by Shariah-compliant status of firms and interest income threshold. The results imply that Shariah compliance promotes transparency and financial integrity, thus reducing firms’ susceptibility to sudden stock price declines. In addition, the results reveal that Muslim directorship, particularly Muslim-majority boards, has a negative association with SPCR. This suggests that Muslim directors, guided by Islamic principles, strengthen corporate governance practices and mitigate SPCR. Originality/value Despite numerous research being performed on the impact of formal corporate governance mechanisms on SPCR, there is a dearth of research focusing on the effect of Shariah compliance as an informal governance mechanism. Moreover, while extant literature has measured Shariah compliance based on Shariah-compliant status of firms and adoption of Shariah-compliant debt financing, the role of interest income threshold remains unexplored. Furthermore, thus far, no research has considered the effect of Muslim directorship on SPCR. It is the main thrust of this study to fill these research voids by investigating the influence of Shariah compliance and Muslim directorship on SPCR.