Issuer's choice of Islamic bond type

• Using conventional bond theory it is expected that firms would view IJV bonds as equity.
• Results suggest that issuers do not consider IJV bonds as equity equivalents.
• SARA bonds did not appear to always represent the ownership of the underlying asset as they should.
• The 2008 AAOIFI Shariah standard on IJV bonds seem to have led to an aversion on their issuance.
• Issuers using Shariah committees as opposed to individual advisors avoided IJV bond issuance.

This paper analyses factors affecting an issuer's choice of Islamic bond structure as compared with conventional financial instruments. This choice is considered in the context of issuer firm variables, the 2008 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFIs) Islamic bond recommendations, and Shariah advisor effect in relation to Islamic instruments. A sample of Malaysian Islamic bonds is analysed using ordered probit model techniques. The results suggest that there are some significant differences between Islamic and conventional bond issuer's choice determinants which can be attributed to characteristics specific to Islamic bonds. For instance unlike conventional bonds, the stock valuation of the issuer did not impact debt–equity targets with Islamic joint venture (IJV) bond issuance. Other results from issuer firm characteristics were mixed and suggest that IJV bonds have little in common with equity and issuers should concentrate on a bond's security and seniority as with conventional bonds, rather than their Islamic structure. Secured against real asset (SARA) bonds were found not to always represent ownership of the underlying asset. AAOIFIs reported concerns in 2008 over Shariah quality of IJV bonds appear to have led to an aversion of IJV bond issuance. Finally, Shariah committees as opposed to individual Shariah advisors demonstrated an aversion to IJV bond issuance.