Determinants of Sukuk Issuance with Mediating Role of Effective Tax Rate

Abstract

Sukuk market has continued to grow over the past two decades, yet researches on determinants of sukuk over conventional bond issuance have produced mixed findings. Previous researches also leave a puzzle why asset tangibility is insignificant to sukuk issuance. To contribute to this debate and answer the puzzle, this study examines the roles of asset tangibility and intangibility, earning and cash volatility, and effective tax rate to investigate why firms issue Sukuk over conventional bonds. Using logistic regression and a dataset of 389 Sukuk and 125 conventional bonds issuances from 2016 to 2020 in Malaysia, the result shows that Sukuk issuers rely more on intangible assets than tangible assets, as unlike conventional bond, the instrument allows tangible and intangible assets combination. This study also finds that Sukuk can be an alternative debt financing for firms with higher cash volatility. Moreover, firms with higher effective tax rate also prefer Sukuk because they may enjoy tax savings due to tax incentive exclusively given to sukuk issuer. This study also shows that effective tax rate serves as a quasi-moderator to asset intangibility and cash volatility. It implies that tax incentives provided by regulators play important role to promote sukuk market.