External and internal determinants of performances of Shariah and non-Shariah compliant firms

Purpose - This study aims to provide comprehensive models that investigate the combination of both external fundamentals and internal characteristics on firm performance and if there is any difference between Shariah and non-Shariah compliant firms. The objective of this paper therefore is to analyze the significant relation between external fundamentals, internal characteristics and firm performance. Design/methodology/approach - Panel data regression analyses are applied to determine significant results. It helps to control for unobserved factors of firm heterogeneity, which may result in spurious regression. Findings - Most internal firm characteristics are found to be significant, but the same cannot be said for external fundamentals. Firm size is found to be very significant in driving both sets of firm performances. Financial distress in term of higher level of leverage is found to be a negative driver of non-Shariah-compliant firms' performance in terms of return on asset but not for Shariah firms consistent with Islamic finance understanding. Shariah-compliant firms with higher liquidity tend to perform much better than less liquid firms, but the same is not found for non-Shariah-compliant ones. Research limitations/implications - This study is limited to the industrial production sector and compares both Shariah and non-Shariah compliant firms. Practical implications - This study adds new findings to clarify the roles of external macroeconomic fundamentals and internal characteristics determinants on firm performance. Findings from this study combine relevant information on different sets of determinants on firm performance and produce empirical evidence beneficial to both sets of Shariah and non-Shariah compliant firms in the industry. Originality/value - This paper fulfills the need for firms to understand the external and internal environment for continuous survival and performance. It is therefore important for firms to recognize the possible factors which may influence their performance and mechanisms to sustain their performance for long-term survival.