Sharia-compliance and investment-cash flow sensitivity in oil rich countries

Purpose The purpose of this paper is to examine the effect of Sharia-compliance (SC) on investment sensitivity to internal funds in oil rich countries. Design/methodology/approach A fixed-effect panel technique with OLS regression is used to investigate such relationship applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council (GCC) stock markets over the period 2009-2014. Findings The results show that the investment-cash flow (ICF) sensitivity is positive, and is a lot larger for more constrained firms. Compared to developed markets, the results show higher ICF sensitivity in GCC countries. The evidence also shows that SC decreases the dependence of firms on internally generated funds when undertaking new investment projects. Unexpectedly, the results reveal that the ICF sensitivity increases when liquidity becomes abundant. Additional analysis suggests that investment expenditures of firms display a greater sensitivity to cash flow in the crisis period. Originality/value The proposed study presents several originalities. First, it provides evidence on ICF sensitivity in specific emerging economies, namely the GCC countries. Second, it highlights the issue of efficient investment. For this purpose, the present paper focuses on Sharia-compliant (SC) firms where financial constraints are bound to be more stringent than for non-Sharia-compliant (NSC) firms. Finally, the study findings enable us to investigate what the sudden abundance of liquidity, generated by the record levels of oil prices, as well as the financial crisis implied for the ICF relationship.