The performance of compliant stocks during the Covid-19 crisis

The outbreak of the Covid-19 pandemic led to a sharp decline in the market value of the global equity markets. The purpose of this paper is to answer the following question: Do compliant firms outperform the non-compliant during the Covid-19 pandemic? A compliant firm must satisfy the qualitative and quantitative criteria defined by Islamic law. Previous research focused on compliant mutual funds, banks, and stock market indexes. Our paper stands out by sorting the cross-section of individual firms into compliant and non-compliant firms and by analyzing the stock performance of both groups during the Covid-19 crisis. Our empirical investigation includes quarterly cross-sectional regressions of stock returns and volatility during the first two quarters of 2020 and daily difference-in-difference regressions of daily stock performance during the Covid-19 period starting from February 24th to April 17th of 2020. We find that compliant stocks outperform the non-compliant peers during the pandemic. We highlight that this out-performance is not associated with higher firm-specific or total risk.