Abstract
The literature is largely silent on questions pertaining to the long-term physical asset investment behavior of Shariah-compliant (SC) firms. In this paper, using a unique dataset of SC firms constructed from the S&P's Compustat Global database, we examine the investment patterns of Shariah-compliant (SC) versus non-Shariah-compliant (NSC) firms in six Gulf Cooperation Council (GCC) countries during the period of 2000 to 2014. We show that SC firms invest significantly less than NSC firms and the effect of reduced investment is stronger among firms with higher investment opportunities. This investment behavior is partly attributable to SC firms' relatively limited access to capital given the tendency to keep leverage at a low level. This robust empirical finding continues to hold when we use various model specifications, alternative definitions of long-term physical investment, and different subsamples, and even when we factor in the endogenous nature of the choice to comply with Shariah.