Shariah index inclusion and stock returns in Egypt: an event study of the EGX33 Shariah Index across sectors

Abstract

Purpose: This study examines the impact of inclusion in the EGX33 Shariah Index on the stock returns of listed Egyptian companies, with a focus on sector-specific effects. It explores whether such inclusion generates abnormal returns, contributing to ethical and Shariah-compliant investing discourse.

Design/methodology/approach: An event study methodology examines cumulative average abnormal returns (CAARs) over a 31-day event window (±15 days) centred on June 12, 2024. All 33 EGX33 constituent firms across 16 sectors are included. A 250-trading-day estimation window and the market-adjusted model generate expected returns, with statistical inference conducted primarily through Corrado rank and generalized sign tests across seven event windows, with parametric t-statistics additionally reported for sectors exhibiting approximately normal return distributions. A Fama-French three-factor (FF3) robustness check using within-sample SMB and HML factors yields positive CAAR across all seven windows, providing additional evidence that the results are robust to an alternative expected-return specification.

Findings: The analysis reveals a statistically significant positive abnormal return around the inclusion announcement, consistent with the proposition that Shariah compliance may signal firm quality to investors, though the underlying mechanism cannot be directly verified from price data alone. Sectoral analysis indicates the most robust positive reactions in healthcare and pharmaceuticals, food and beverages, and textile and durables, consistent with signalling theory.

Research limitations/implications: The simultaneous inclusion of all 33 firms on a single event date creates cross-sectional dependence among abnormal returns, addressed through non-parametric inference tools. Full-market Egyptian factor data remain unavailable, limiting FF3 precision. Future research should examine staggered post-launch additions and construct full-market Egyptian FF factors.

Practical implications: The findings carry targeted implications for three stakeholder groups. For index constructors and regulators, the significant heterogeneity in sector reactions suggests that the EGX33 composition and Shariah screening criteria warrant periodic review, particularly for sectors exhibiting persistent negative reactions such as Banks and Basic Resources. For institutional investors, the consistent positive abnormal returns in Healthcare and Pharmaceuticals, Food and Beverages, and Textile and Durables identify these sectors as the most responsive to Shariah certification signals, making them natural candidates for Islamic ETF development on the EGX. For retail investors, the pre-event positive reaction on AD-6 highlights the importance of timely and transparent public disclosure of Shariah screening decisions by the EGX Shariah Supervisory Board.

Originality/value: This study provides the first empirical evidence on the market effects of inclusion in Egypt's EGX33, the first dedicated Shariah index in the Egyptian Exchange, across 16 industry sectors in a frontier market context. Beyond geographic novelty, it enhances inferential reliability through multi-window non-parametric inference and FF3 robustness checks absent from earlier regional studies, while acknowledging that generalizability remains constrained by the single-event structure.