Asymmetric information and securitization design in Islamic capital markets

Motivated by religious prescriptions and severe informational problems in the corporate sukuk market, we investigate how capital market imperfections influence sukuk securitization design, focusing on tranching and subordination practices. Employing negative binomial regressions and a 2SLS regression framework for a sample of 335 corporate sukuk offerings in Malaysia between 2001 and 2014, we find Islamic finance principles matter to sukuk securitization design. For private firms, lease-based sukuk have less tranching, consistent with the significance of collateral value resilience (asset tangibility) in reducing investment risk. Contrary to expectations, equity-based sukuk have fewer tranches and lower levels of subordination – findings which we attribute to the principal and profit guarantee under this structure. We also find support for the stylized view that securitization stems from asymmetric information and market segmentation arguments. An implication of our research is that investors should pay attention to how sukuk structure, information asymmetry, and credit risk impact subordination to avoid deals with poor credit enhancement. •We test for the presence of information asymmetry and segmentation in sukuk securitization•We find sukuk securitization design is primarily motivated by information asymmetry concerns•Tranching and subordination are extensive when sukuk assets are low-quality and highly information-sensitive•Islamic finance structure explains sukuk securitization design•We also provide evidence of market segmentation in sukuk securitization