Shariah-Compliant Investing as Financial Social Innovation: Stock Performance in the Philippine Stock Market

Abstract

This study examines whether Shariah compliance is associated with systematic differences in firm characteristics, returns, and risk in the Philippine equity market, a frontier setting with limited Islamic capital market infrastructure. Using firm-level data for investable companies listed on the Philippine Stock Exchange from 2021 to 2025, the analysis proceeds in three stages. First, descriptive statistics identify structural differences between Shariah-compliant and non-compliant firms. Second, unconditional tests, including t-tests and Wilcoxon rank-sum tests, assess differences in returns and volatility. Third, the Fama-MacBeth regression is employed to evaluate whether Shariah compliance is priced in the cross-section of returns after controlling for firm characteristics. The results show that Shariah-compliant firm-month observations are significantly smaller, less leveraged, and more growth-oriented, reflecting the constraints imposed by screening criteria. Unconditional tests indicate that these exhibit lower returns and slightly higher volatility. However, the Fama-MacBeth cross-sectional results reveal that the return differential becomes statistically insignificant once firm characteristics are accounted for, indicating that Shariah compliance is not a priced characteristic. While a modest association with higher volatility is observed in certain specifications, the effect is economically limited. Overall, the findings suggest that Shariah compliance does not function as a cross-sectional pricing factor, but rather operates as a constraint-based selection mechanism that shapes firm characteristics already reflected in market outcomes. The results contribute to Islamic finance and social innovation literature by showing that Shariah-compliant investing in a frontier Muslim-minority market can serve as an inclusive ethical investment channel.