Islamic Securities in Corporate Financial Hierarchy

In this paper, we investigate the place of Islamic investment securities (sukuk) in firms' financial hierarchy using the modified pecking order theory. We study the external funding preferences of Malaysian firms using quarterly data of 112 firms for the period between 2005 and 2017. We find that when internal funds are exhausted, firms prefer to issue profit-loss sharing sukuk over bonds and fixed income sukuk is placed before equity. The results show that sukuk can widen the external finance spectrum which has important implications for policymakers in countries with dual financial systems.