Journal of Islamic Monetary Economics and Finance.
Vol.
No.
, pp.
385 - 418
p-ISSN: 2460-6146, e-ISSN: 2460-6618
WEATHERING THE STORM: SHARIAH COMPLIANCE,
DIGITAL INNOVATION.
AND STOCK PERFORMANCE
DURING COVID-19
Mohamad Ikhsan Modjo1.
Florencia Putridamni2 and Ariella Shenny Lin3 School of Accounting.
BINUS University.
Indonesia, mohamad.
modjo@binus.
School of Accounting.
BINUS University.
Indonesia, florencia.
putridamni@binus.
School of Accounting.
BINUS University.
Indonesia, ariella.
lin@binus.
ABSTRACT
The COVID-19 pandemic disrupted global financial markets, highlighting the need for factors that enhance resilience.
This study examines whether Shariah compliance and digital innovation, individually and together, mitigate declines in stock performance during economic downturns.
Drawing on Signaling Theory and Dynamic Capabilities Theory (DCT), this study argues that Shariah compliance serves as a signal of strong governance, while digital innovation enhances adaptability.
Using firm-level data from Indonesia and a difference-in-differences (DID) model, our findings suggest that both factors help firms withstand crises, with digital innovation amplifying the benefits of Shariah compliance.
This study provides insights into how Islamic finance and digital transformation contribute to financial stability.
Keywords: Shariah stocks.
Stock performance.
COVID-19.
Digital transformation.
JEL classification: G24.
K42.
O33.
Article history:
Received : October 4, 2024 Revised : February 25, 2025 Accepted : May 30, 2025 Available online : June 26, 2025 https://doi.
org/10.
21098/jimf.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19
INTRODUCTION
Islamic finance, a rapidly expanding segment within global financial markets, holds particular significance in Indonesia, the worldAos largest Muslim-majority The unprecedented COVID-19 pandemic posed severe challenges to traditional business models, emphasizing the need for swift adaptation through digital innovation to sustain operations and growth.
Against this backdrop, this research investigates the critical intersection of Shariah compliance, digital innovation, and stock performance during the pandemic, aiming to provide new insights into firm resilience amid economic shocks.
The global financial turmoil triggered by COVID-19 significantly impacted businesses and stock markets worldwide.
While initial studies identify a negative correlation between the pandemicAos escalation and stock market performance, emerging research highlights the varying resilience of firms based on sectoral and structural characteristics.
Notably, businesses in Audefensive sectors,Ay with inherently lower risk profiles and often aligned with Shariah principles, showed greater stability during the crisis (Al-Awadhi et al.
, 2020.
Ashraf, 2.
This observation raises important questions about the buffering role of Shariah compliance against financial volatility, especially when coupled with digital Despite substantial literature examining the pandemicAos effects on financial markets, a critical knowledge gap persists.
Existing studies predominantly focus on the independent effects of Shariah compliance and digital innovation on firm For example, research has explored the relationship between Shariah compliance and stock performance (Cheong, 2021.
Haseeb et al.
, 2023.
Shear & Ashraf, 2.
, as well as the influence of digital innovation on financial performance (Haidar et al.
, 2023.
Wu et al.
, 2.
However, the interplay between these two factors remains unexplored, particularly during an unprecedented crisis like COVID-19.
This gap is particularly surprising given their potential synergy, where digital innovation could amplify the benefits of Shariah compliance in enhancing firm resilience.
This study seeks to address this gap by analyzing the combined and individual impacts of Shariah compliance and digital innovation on the stock market performance of Indonesian firms during the pandemic.
It explores whether Shariah-compliant firms exhibited better performance due to a shift in investor preferences towards more conservative and ethical investments during the crisis.
Additionally, the study examines how digital innovation enabled these firms to expand their reach, maintain operational efficiency, and adapt to volatile market conditions, thereby potentially reinforcing the positive effects of Shariah Indonesia provides a compelling context for this investigation.
The countryAos regulatory framework strongly emphasizes sustainability and ethical business practices, aligning closely with Shariah principles.
Moreover.
Indonesia has seen significant growth in Shariah-compliant investments, driven by increasing demand for ethical and resilient financial options.
Supported by a regulatory framework emphasizing sustainability, these investments have gained prominence during economic uncertainty Ai particularly through instruments listed on the Indonesia Stock Exchange (Minandar et al.
, 2020.
Wahyono, 2.
This research adds to the discussion on Islamic financeAos role in enhancing financial resilience during crises.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 The paper is organized as follows: The next section reviews the relevant literature, followed by the methods section.
The fourth section reports empirical findings, and the final section concludes the study.
II.
THEORY AND HYPOTHESES
Theoretical Framework: Understanding Firm Resilience During Crisis Financial crises, such as the COVID-19 pandemic, disrupt traditional business operations and financial stability, testing firmsAo resilience.
However, firms can leverage key resources to navigate these challenges effectively.
This study focuses on Shariah compliance and digital innovation as two critical resources, examining how they influence stock performance during crises.
Specifically, we investigate how digital tools and strategies amplify the impact of Shariah-compliant practices, using Indonesian firms during the pandemic as a case study.
Signaling the Value of Shariah Compliance Signaling Theory explains how firms communicate valuable information to investors through their actions or characteristics (Galloway & Miller, 2.
For Shariah-compliant firms, adherence to Islamic principles signals strong governance, prudent risk management, and a long-term orientation (Ramadani.
These attributes are particularly attractive to risk-averse investors during periods of uncertainty.
Shariah compliance forms the foundation of Islamic finance, which fosters financial stability through its conservative financial structures and focus on ethical These structures reduce exposure to volatile market conditions (Azad et al.
, 2018.
Cheong, 2.
Moreover, the principles inherent in Shariah complianceAisuch as ethical business practices, sustainability, and stakeholder welfareAialign with the broader concept of ethical investment, enhancing firmsAo appeal to socially conscious investors seeking responsible investment opportunities (Sari & Suprayogi, 2.
In addition to financial benefits, the stricter governance frameworks inherent in Shariah compliance strengthen transparency and accountability, building investor trust.
By signaling resilience and ethical commitment.
Shariah-compliant firms differentiate themselves from conventional counterparts, particularly during crises when stability and integrity are highly valued.
This connection between Shariah compliance.
Islamic finance, and ethical investment underscores how firms adhering to these principles can achieve a competitive advantage by addressing both financial and ethical considerations.
Digital Innovation as a Dynamic Capability Dynamic Capabilities Theory (DCT) highlights a firmAos ability to adapt, reconfigure, and exploit resources to gain a competitive advantage in dynamic environments (Teece et al.
, 1.
In this study, digital innovation is conceptualized as a dynamic capability that enables firms to maximize the benefits of Shariah compliance while responding effectively to crisis-induced challenges.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Digital tools empower Shariah-compliant firms by enhancing operational efficiency and transparency.
For instance, in the banking sector, the adoption of digital banking platforms by Islamic financial institutions has significantly streamlined operations, reduced transaction costs, and improved service delivery.
Studies by Dahdal et al.
and Mohd Haridan et al.
reveal that Islamic banks leveraging blockchain technology have been able to enhance Shariah compliance by automating contract verification and ensuring real-time monitoring of financial transactions.
This not only reduces the risk of non-compliance but also boosts investor confidence in the integrity of these institutions.
In the retail industry, digital innovation has enabled firms to integrate ethical practices with consumer engagement strategies.
For example, companies adopting digital supply chain technologies, such as the Internet of Things (IoT) solutions, have been able to improve traceability and ensure that their operations align with ethical and sustainable principles, which are core to Shariah compliance.
Research by Haidar et al.
highlights how digital platforms such as e-commerce marketplaces have provided a transparent mechanism for promoting Shariahcompliant products, thereby expanding market reach and fostering customer trust.
Moreover, big data analytics plays a pivotal role in optimizing resource allocation and reducing waste, aligning with Shariah principles that discourage inefficiency (W.
Wu et al.
, 2.
By analyzing consumer behavior and market trends, firms can develop targeted strategies that maximize value creation while adhering to ethical guidelines.
Digital innovation also facilitates operational agility, enabling firms to adapt quickly to market disruptions and changing consumer demands.
In the financial sector, robo-advisors tailored for Shariah-compliant portfolios have enhanced customer satisfaction by offering personalized investment solutions that adhere to Islamic principles (Hooda et al.
, 2.
Similarly, in the logistics sector, digital tools such as real-time tracking systems have improved transparency and operational efficiency, ensuring compliance with ethical standards throughout the supply chain (Krishnan et al.
, 2.
Furthermore, the integration of digital technologies amplifies the signaling benefits of Shariah compliance.
For example, blockchain-based platforms in Islamic finance enable firms to communicate their adherence to ethical practices more effectively by providing investors with transparent records of financial transactions (Hassan et al.
, 2.
This not only reinforces investor trust but also attracts a broader base of socially conscious stakeholders who value both ethical and technological excellence.
Overall, the evidence from multiple sectors underscores the transformative potential of digital innovation as a dynamic capability.
These technologies not only enhance operational efficiency and agility but also amplify the ethical commitments central to Shariah compliance, strengthening firmsAo resilience and long-term value creation during crises.
Integrating Shariah Compliance and Digital Innovation The combination of Shariah compliance and digital innovation creates a powerful synergy, where digital tools amplify the operational efficiency and signaling benefits Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 of ethical business practices.
By leveraging digital innovation.
Shariah-compliant firms can showcase the tangible outcomes of their principles, strengthening trust among investors and fostering deeper customer loyalty.
This interplay enhances firmsAo ability to withstand crises, positioning them to not only maintain but also improve financial performance during turbulent For example, digital platforms can highlight Shariah-compliant firmsAo commitment to ethical investments and responsible business practices, attracting a diverse investor base, including those aligned with both Islamic finance and broader sustainability goals.
Grounded in Signaling Theory and Dynamic Capabilities Theory (DCT), this framework illustrates how Shariah compliance and digital innovation interact to bolster firm resilience.
Shariah compliance provides a solid foundation of ethical and sustainable practices, while digital innovation acts as a catalyst, extending these benefits through enhanced adaptability and communication.
This integration equips firms with the tools to navigate economic uncertainties effectively and secure long-term competitive advantages.
The Impact of Shariah Compliance on Stock Performance During Crises Research on the impact of Shariah compliance on stock performance during crises reveals a complex and evolving picture.
Early studies, such as M.
Hasan et al.
, suggest that Islamic and conventional stock indexes exhibited similar levels of volatility and declines during the COVID-19 pandemic.
However, more recent findings point to several distinct advantages for Shariah-compliant firms that may contribute to their greater resilience during crises (Cheong, 2021.
Haseeb et al.
Shear & Ashraf, 2.
These advantages include a lower risk profile, ethical business practices, and a focus on long-term sustainability, which collectively enhance firm performance.
Additionally.
Shariah compliance has been associated with improved financial metrics, such as higher returns on assets (ROA) and returns on sales (ROS) (Pepis & de Jong, 2.
Key features of Shariah compliance, such as prohibitions on excessive debt and speculative activities, play a critical role in reducing financial risk during economic downturns (Sherif, 2.
This conservative financial structure aligns with investor preferences for stability during periods of uncertainty.
Research by Chowdhury et al.
and Dharani et al.
supports this view, reporting lower volatility and faster recovery for Shariah-compliant stocks compared to conventional counterparts during the COVID-19 shock.
The resilience of these stocks is further attributed to the exclusion of high-risk sectors, such as gambling and alcohol, in Shariah-compliant investments.
In addition to lower risk profiles.
Shariah compliance attracts a dedicated investor base seeking ethical investments.
These investors prioritize long-term value creation and social responsibility, providing Shariah-compliant firms with a relatively stable demand for their stocks, even in volatile markets (Salvi et al.
This investor loyalty can buffer Shariah-compliant stocks against market shocks and contribute to their recovery during crises.
The benefits of Shariah compliance may extend beyond immediate financial By emphasizing long-term sustainability and stakeholder well- Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 being, principles inherent in Shariah encourage firms to adopt crisis-resilient strategies (Sadeghi, 2008.
Lusyana & Sherif, 2.
In the Indonesian context, these principles align with the countryAos robust Islamic finance ecosystem and regulatory framework, which prioritize ethical practices and sustainability (Wahyono, 2.
This alignment has fostered a strong domestic and international investor base for Shariah-compliant assets, particularly during times of uncertainty.
Importantly, the impact of Shariah compliance on stock performance during crises may not always be immediate.
Studies by Chowdhury et al.
and Dharani et al.
suggest a delayed positive effect, as investors reassess the risk profiles and long-term value propositions of Shariah-compliant firms.
Such delays may occur due to initial market skepticism or a lack of immediate visibility of Shariahcompliant firmAo advantages during crises.
Wahyono .
further highlights the potential role of government incentives, such as tax benefits for Shariah-compliant firms, in enhancing their attractiveness and boosting performance over time.
In summary, while early evidence indicates similar performance for Shariahcompliant and conventional stocks during crises, a growing body of research underscores the unique resilience of Shariah-compliant firms.
This resilience stems from their conservative financial practices, dedicated investor base, and alignment with sustainability principles.
However, the full benefits of Shariah compliance may take time to materialize, particularly during market disruptions.
Based on these insights, we propose the following hypothesis:
H1: Shariah compliance improves stock market performance during crises.
Digital Innovation and Stock Performance The COVID-19 pandemic underscores the critical role of digital innovation in ensuring business resilience and profitability.
Research by the Ministry of Communications and Informatics .
indicates a rapid digital transformation in Indonesia during the crisis, with a projected growth rate of 33.
2% from 2020.
This surge reflects the success stories of firms that embraced digital innovation, surviving and thriving amidst unprecedented challenges (Haidar et al.
, 2023.
Wu et al.
, 2.
From the perspective of Dynamic Capabilities Theory (DCT), digital innovation enhances a firmAos ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.
Digital technologies enable firms to sense opportunities, seize them through innovation, and reconfigure operations to maintain competitiveness.
This adaptive capability is vital during crises, where agility and resilience determine survival.
For example, firms that implemented digital solutions during the pandemic streamlined internal processes, optimized resource allocation, and reduced costs (W.
Wu et al.
These dynamic capabilities directly enhance their profitability and financial stability, fostering investor confidence.
Additionally, digital platforms facilitate effective customer interactions, product offerings, and marketing strategies (Liu & Jung, 2.
Firms leveraged these platforms to adapt to changing consumer behavior during the pandemic, retaining or expanding their customer base.
The ability to quickly adapt to market shifts aligns with DCTAos emphasis on agility, which is critical for navigating disruptions and creating long-term shareholder value (Chen et al.
, 2.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 Liu et al.
further highlight the financial benefits of digital transformation, particularly its impact on stock market performance.
Firms that embraced digital innovation experienced enhanced stock liquidity, reduced risk of stock price crashes, and improved accuracy in analystsAo forecasts.
However, the benefits of digital innovation are not always immediate.
Initial implementation often involves significant investment in technology, employee training, and process reengineering, which can strain resources and disrupt traditional operations in the short term (Chen et al.
, 2.
For this reason, some firms may initially experience negative impacts on metrics such as return on assets (ROA) and return on equity (ROE).
Conversely, digital maturity over time enables firms to unlock the long-term value of digital innovation.
Jardak & Ben Hamad .
emphasize that while short-term setbacks may occur, the eventual integration of digital capabilities positively impacts TobinAos Q, reflecting sustained value creation.
This suggests that the benefits of digital transformation on stock performance may manifest with a delayed effect, as firms adapt and investors recognize the potential for growth and resilience.
In conclusion, digital innovation, as a dynamic capability, empowers firms to adapt, innovate, and thrive in uncertain environments.
While initial implementation may involve challenges, its long-term benefits are evident in enhanced resilience, profitability, and stock market performance.
Therefore, we propose the following (H.
: Digital innovation positively impacts a companyAos stock performance during crises, with a possible delayed effect.
Interaction Effect: Shariah Compliance and Digital Innovation The interaction between Shariah compliance and digital innovation offers a unique pathway to resilience during crises.
Digital tools can amplify the benefits of Shariah-compliant practices by enhancing operational efficiency, transparency, and customer trust (Alsaghir, 2023.
Demirdyen, 2.
For instance, blockchain technology provides an immutable and transparent record of financial transactions, ensuring that firms adhere to Shariah principles such as the prohibition of interest .
and unethical practices (Hassan et al.
, 2.
By embedding Shariah-compliance verification into blockchain systems, firms can build greater trust among investors and stakeholders, particularly those prioritizing ethical In addition to enhancing transparency, digital innovation enables firms to extend the operational benefits of Shariah compliance.
For example.
Islamic banks have leveraged artificial intelligence (AI) and machine learning to offer personalized financial services while adhering to Shariah principles.
Robo-advisors, tailored to Shariah-compliant portfolios, provide automated, low-cost investment solutions that align with Islamic values, significantly improving customer satisfaction and expanding access to ethical investment opportunities (Yu & Alsaud, 2.
These innovations strengthen the market positioning of Shariah-compliant firms, particularly in competitive financial sectors.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 The logistics sector provides another compelling example of how digital tools enhance compliance with Shariah principles.
Real-time tracking systems and Internet of Things (IoT) technologies improve supply chain transparency, enabling firms to monitor goods throughout their journey (Krishnan et al.
, 2.
This level of oversight ensures that ethical standards are maintained across the supply chain, preventing issues such as fraud or the inclusion of prohibited .
items in By integrating these technologies, firms can demonstrate a strong commitment to ethical practices, reinforcing their value to socially conscious Furthermore, digital innovation amplifies the signaling benefits of Shariah According to Signaling Theory, firms that effectively communicate their ethical commitments to stakeholders are more likely to attract investment and foster trust (Ramadani, 2.
Digital platforms allow Shariah-compliant firms to showcase their sustainability efforts, ethical governance, and financial transparency to a broader audience.
For example, digital marketing campaigns highlighting the ethical advantages of Shariah-compliant financial products can attract both Muslim and non-Muslim investors seeking socially responsible While the integration of digital innovation and Shariah compliance offers substantial benefits, the full impact of this synergy may take time to materialize.
Initial implementation costs, such as upgrading IT infrastructure or training staff to use digital tools, can pose short-term challenges (Jardak & Ben Hamad, 2.
However, these investments ultimately strengthen a firmAos resilience by enabling it to adapt to crises and seize opportunities in dynamic markets.
In summary, the interplay between Shariah compliance and digital innovation enhances a firmAos ability to withstand crises by improving operational efficiency, transparency, and ethical signaling.
By leveraging these tools, firms can align their business practices with the growing demand for sustainability and ethical governance, ensuring long-term competitive advantages in volatile markets.
Hypothesis 3 (H.
: Digital innovation moderates the positive relationship between Shariah compliance and stock market performance during crises, with potential delayed effects.
METHODOLOGY
Data Collection and Samples This study investigates the impact of the COVID-19 pandemic on firm performance, using daily stock price data from the Bloomberg database.
The data, covering the third quarter of 2019 to the second quarter of 2020, allow us to analyze market reactions to the unfolding pandemic.
We focus on the KOMPAS-100 index of the Indonesia Stock Exchange (BEI) because it comprises high-performing companies, a significant portion of which have crucial ESG scores.
The KOMPAS-100 offers a concentrated pool of companies with available ESG scores, making it a more suitable sample for our analysis.
Furthermore, the KOMPAS-100, like the broader IDX Composite, represents approximately 80% of the total market capitalization of its respective population, ensuring our sample captures a substantial portion of market activity.
These ESG scores are essential for our subsequent analysis of digital innovation, a factor Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 frequently unreported by companies listed on the broader IDX Composite index.
To analyze the relationship between daily stock movements and company financials, we merged high-frequency stock market data .
aily stock return.
with lower-frequency financial data .
uarterly report.
This approach, supported by prior studies .
Zhong & Enke, 2019.
Zhou et al.
, 2.
, leverages the predictive value of quarterly financial data for understanding stock price However, merging data with differing frequencies presents challenges, particularly when daily data must be aligned with quarterly information.
To address this, we used forward-fill interpolation .
ia the mipolate command in Stat.
to convert quarterly data into daily observations.
Forward-fill interpolation assigns the latest available quarterly value to subsequent daily observations until a new quarterly report is available.
This ensures continuity but may smooth out short-term financial variations.
To verify robustness, we compared results using backward-fill and linear interpolation, finding consistent patterns (H.
Zhou et al.
Our primary goal was to capture daily trends in the relationship between Shariah compliance, digital innovation, and stock performance, rather than tracking precise financial fluctuations within each quarter.
This focus aligns with the theoretical framework, which emphasizes the importance of high-frequency data in assessing market reactions to shocks like the COVID-19 pandemic.
In selecting indices, we also consider the Indonesia Shariah Stock Index (ISSI) alongside the Jakarta Islamic Index (JII).
The JII is chosen because it filters for Shariah compliance and financial performance, aligning with our focus on high-performing firms.
This choice mirrors our rationale for selecting the KOMPAS-100 index, which prioritizes top-performing companies that report ESG Together, the KOMPAS-100 and JII represent significant portions of their respective market segments, enhancing the generalizability of our findings.
The combination of daily stock returns and quarterly financial data offers several key advantages.
First, it generates a large sample size, reducing the likelihood of biased estimations.
Second, daily data capture continuous market reactions to COVID-19 shocks, which quarterly data alone could not achieve.
Lastly, the dataset spans three-quarters of the COVID-19 pandemic, enabling us to analyze both the immediate and extended impacts on firm performance.
This comprehensive data collection approach, incorporating firm characteristics and financial metrics, allows us to explore various mechanisms in our models while mitigating omitted variable bias.
By combining robust data handling techniques and a representative sample, our study offers meaningful insights into the resilience of firms during the COVID-19 pandemic.
Dependent Variables The primary dependent variable for measuring stock performance is the cumulative abnormal return (CAR), which is obtained by first calculating the expected return (ERi.
using this formula:
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Rmt denotes the market return on day t over the event window, and 0 and 1 are estimated coefficients.
We then compute the abnormal returns (ARi.
by following Fama et al.
Finally, following the literature, we calculate CAR by summing up AR over the sixty days before and after an event date (MacKinlay, 1.
This study classifies a company as Shariah compliant if its stock is included in the Jakarta Islamic Index (JII) during the first semester of 2020 (Minandar et al.
Wahyono, 2.
While JII consists of the 30 most liquid Shariah-compliant stocks.
JII70 includes a broader set of 70 firms.
The main analysis uses JII due to its liquidity focus, whereas JII70 is introduced as a robustness check to validate findings across a wider spectrum of Shariah-compliant firms.
Constituents of the JII are from the IDX, which reviews and updates the list biannually based on criteria outlined by the Indonesian Financial Service Authority (OJK) and the Majelis Ulama Indonesia (MUI).
Additionally, we classify sample companies into two groups: companies with and without digital innovation.
These groups are measured based on whether firms allocate spending on digital innovation initiatives, including investments in software, hardware, and IT infrastructure (Anas & Cahyawati, 2023.
Muchlis et , 2021.
Wu et al.
, 2.
Digital innovation classification is based on firmsAo disclosed investments in digital transformation initiatives within financial reports, categorized according to standard industry benchmarks (Anas & Cahyawati, 2.
To ensure consistency, only firms with documented expenditures on software, cloud computing.
AI, or digital infrastructure during Q1 2020 are considered digitally innovative.
We also construct the Size-Age (SA) index proposed by Hadlock & Pierce .
as a dependent variable to indicate firmsAo financial constraints.
The size of the enterprise is the natural logarithm of total assets, and age is the total number of months since a firmAos stock was publicly offered (IPO).
The SA index is computed using the following formula:
In Equation .
, a larger SA index indicates greater financial constraint .
, a smaller absolute valu.
This paper controls specific characteristics of companies, selected based on their relevance in past studies.
Following the paper by Albuquerque et al.
and Broadstock et al.
, these controls include the companyAos size, age, leverage, liquidity, and return on assets (ROA).
For the final sample, we exclude stocks from Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 the financial sector due to their unique business models and financial reporting We also remove samples with missing values in the independent variables, whereas continuous variables are winsorized at the 1% and 99% levels.
The variables and their detailed definitions are discussed in Table 1.
Table 1.
Variable Definitions Variables Codes Definitions Dependent variable.
Cumulative abnormal The cumulative AR for the 60 days before and after the CAR stock returns event date Independent vars.
Digital Innovation DInnov Natural log .
nvestment in digital infrastructur.
Jakarta Islamic Index 70
JIS70
JIS70 = 1 if stock is constituent of JII70, 0 otherwise Digital Innovation DIV = 1 if a firm invests in digital infrastructure, 0
DIV
Financing constraint DSAi DSAi = 1 if SAi score in Q4-2019 > mean score, 0 otherwise.
DID vars Shariah compliance JIS
JIS = 1 if stock is constituent of JII, 0 otherwise Digital Innovation DIV = 1 if a firm invests in digital infrastructure, 0
DIV
COVID = 1 if a date is on or after March 2 2020, 0
The COVID-19
COVID
pandemic period Shariah-compliant firms JISyDIV Interaction of JIS and DIV with Digital Innov.
Interaction of JIS and JISyCOVID
Interaction of JIS and COVID
COVID
Interaction of DIV and DIVyCOVID
Interaction of DIV and COVID
COVID
Interaction of JIS.
DIV.
JISyDIVyCOVID Interaction of JIS*DIV* COVID and COVID Control vars.
Age of a firm Age Natural log .
ime since IPO in month.
Size of a firm Size Natural log .
otal asset.
Stock historical volatility Vola Stock volatility as calculated from daily raw returns Total debt relative to Leverage Total firm debt / total firm assets total assets Research and RND Natural log (R&D expense.
Development Total Cash cash equivalent in firm asset/ total current Liquidity of a firm Liquidity Return on total assets ROA Net income/ total assets Financing Constraint Firm financing costrain calculated as SA = -0.
737 * Size_it Size-Age Index SAi 043 * Size^2 - 0.
040 * Age (Hadlock & Pierce, 2.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Empirical Models This study uses the difference-in-differences (DID) estimation approach to analyze the different outcomes between Shariah compliance and non-compliance firms during the COVID-19 shock.
Our DID is specified as follows:
CARit represents the cumulative abnormal return of stock .
at time .
The JISycn is a dummy variable that equals one if the companyAos stock belongs to the JII index or zero otherwise.
COVIDyc is a dummy variable that equals one for periods on or after the event date (March 2, 2.
JISycn y COVIDyc represents the interaction term between JISycn and COVIDyc.
The control vector Xit comprises a series of control variables for company characteristics.
The above specification also controls individual company fixed effects and day-period fixed effects.
The DID regression for analyzing the effect of digital innovation could be obtained by replacing the JISi in Equation .
with DIVj dummy variables, where DIVj is equal to 1 if the company invests in digital innovation initiatives, including investments in software, hardware, and IT infrastructure and 0 otherwise.
The JISycn y COVIDyc (Equation .
, or DIVj y COVIDt (Equation .
, is our coefficient of interest, representing the joint effect of JISi, or DIVj, and COVID-19 shock.
This method assumes parallel trends, implying that in the absence of COVID-19 shock.
CARs would have followed similar paths over time for the treatments (JISi or DIV.
and their control groups.
To check this assumption, we will plot pre-pandemic trends of CARs for Shariah-compliant firms .
nd firms with digital innovation.
relative to their respective controls.
Triple Differences Shariah-compliant stocks are considered a defensive asset class.
Their adherence to Islamic principles tends to moderate their performance, lessening the impact of market crises such as the COVID-19 pandemic.
This moderating effect can offer investors a degree of protection against severe losses during economic downturns.
This study also explores whether a firmAos digital innovation further moderates this resilience during an economic downturn.
Using a novel triple difference test, the research examines the interaction between Shariah compliance and digital innovation to provide valuable insights into how companies can navigate challenging economic periods.
This triple difference test examines the moderating roles of both digital innovation and Shariah compliance on firm stock resilience during the COVID-19 The sample is first divided into Shariah-compliant and non-compliant companies, indicated by the variable JISycn.
To facilitate this test, the study utilizes the previously introduced DIVj variable, which equals one if the companyAos stock belongs to a firm with digital innovation and zero otherwise.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 This analysis further incorporates interaction terms to capture the combined effects of digital innovation.
Shariah compliance, and the pandemic.
DIVjyCOVIDt indicates whether a stock belongs to a firm with digital innovation during the This variable is derived from the interaction between DIVj and the binary variable COVIDt, which equals one during the pandemic period and zero Similarly.
DJISit represents the interaction between DIVj and JISycn, while JISiyCOVIDt captures the interaction between JISycn and COVIDt.
Finally.
JISycnyDIVjyCOVIDt represents the three-way interaction between JISycn.
DIVj, and COVIDt.
Following previous research (Buchanan et al.
, 2018.
Cui et al.
, 2018.
Sun et al.
, the outcome variable CARit is described with the following specifications:
The triple difference approach is implemented using three multiple interaction terms as per Equation .
, which include firm-fixed effects to account for timeinvariant firm-specific factors.
This study focuses on the triple interaction term , which is critically important.
It is an estimation of whether the differences in responses between companies with Shariah compliance and digital innovation and companies with Shariah compliance without digital innovation compared to their respective control groups are significant following the COVID-19 pandemic.
Event Window Our study employs a difference-in-differences (DID) and triple-difference model framework to analyze the impact of COVID-19 on the stock performance of Shariah-compliant and digitally innovative firms compared to their non-compliant The selection of the event window .
he period considered to be directly affected by the even.
is crucial for accurate analysis.
We have chosen a collapsed window encompassing February 6, 2020, to March 24, 2020, as our primary event window.
This specific period aligns with the AucollapsedAy or AufeverishAy phase identified in previous studies (Engelhardt et , 2021.
Fahlenbrach et al.
, 2021.
Zhou & Zhou, 2.
During this period, the global stock market experienced a significant decline due to the initial shock and uncertainty surrounding the COVID-19 pandemic.
The justification for the collapsed window lies in the confluence of market volatility and policy uncertainty.
This timeframe captures the period of heightened market instability caused by the initial outbreak of the pandemic and its immediate economic repercussions.
Simultaneously, this window coincides with the peak of uncertainty surrounding government policies and potential responses to the Essentially, it isolates a period where both market behavior and government actions were highly unpredictable, making it a distinct and impactful segment for To gain a more comprehensive understanding, we will also conduct analyses using two additional windows:
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Post-Collapsed Window: This window encompasses the entire first half of 2020, allowing us to observe how the market reacted to the first wave of government interventions, such as economic stimulus packages and lockdown Extended Window: To assess long-term market dynamics and potential rebound effects, we will conduct robustness checks using a wider window encompassing 90 days before and after the key event date (February 6, 2.
Employing multiple event windows provides a more comprehensive understanding of COVID-19Aos impact across distinct market phases.
This allows us to analyze the initial shock, the effectiveness of policy interventions, and potential signs of recovery.
Furthermore, analyzing multiple windows provides robustness checks.
Consistent findings across different timeframes strengthen the validity of our conclusions.
This multi-window approach ultimately yields a more comprehensive understanding of how these factors influenced firms during the Descriptive Analysis Table 2 summarizes the key characteristics of the variables used in our study.
The sample size of 12,489 observations reflects the total number of daily stock returns employed in our analysis.
This comprehensive dataset allows us to capture the nuanced daily fluctuations in firm performance throughout the study period.
Table 2.
Summary Statistics Variable SAi
DIGinnov
Size
Age
ROA
RND
Vola
Leverage Liquidity DebtEquity JIS
JIS70
DIV
COVID
JISyCOVID DIVyCOVID JISyDIVyCOVID Mean Min Max Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 To achieve this, we examine data for 69 firms listed on the KOMPAS-100 index of the Indonesia Stock Exchange (BEI).
The specific timeframe for this analysis is captured through multiple event windows detailed in the AuEvent WindowAy section (Section 3.
The length of these windows varies depending on the stage of the COVID-19 pandemic we are examining.
By multiplying the number of firms .
by the total number of days across all event windows .
, we arrive at the total number of observations .
used to calculate the daily CAR .
umulative abnormal retur.
for each firm.
The distribution of the CAR index, ranging from -0.
2581 to 0.
6793, indicates some variation in firm performance.
The median .
being lower than the mean .
suggests a positive skew in the distribution.
This pattern implies that while some firms experienced significant positive returns during the observation period, the majority had lower returns.
The standard deviation .
further reflects this moderate variation in firm performance.
Key variables include the dummy indicators for Digital Innovation (DIV) and Shariah-compliant firms (JIS).
The DIV variable .
for firms engaged in digital innovation and 0 otherwis.
has an average value of 0.
3043, indicating that about one-third of the sample engaged in digital innovation during the first quarter of 2020Aia period marked by the onset of COVID-19.
Similarly, the JIS variable .
for Shariah-compliant firms and 0 for other.
4203, revealing that slightly less than half .
%) of the firms in our sample are Shariah-compliant.
Our analysis also incorporates several control variablesAifirm size, age, debtto-equity ratio, and return on assets (ROA)Aito better isolate the effects of digital innovation and Shariah compliance on firm performance.
The Size-Age Index (SA.
, included as a dependent variable, averages -2.
095 and ranges from -3.
432 to -0.
indicating its role in exploring financing constraints.
The average firm size is 17.
anging from 15.
133 to 19.
, and the average firm age is 5.
It is important to note that the variable AuAgeAy represents the natural logarithm of time since IPO in Therefore, the decimal values for the minimum and maximum of AuAgeAy are expected as they reflect the logarithmic transformation.
The debt-to-equity ratio 8430, reflecting a moderately high level of firm indebtedness, while ROA averages 0.
Interaction terms, such as AuJISyCOVID,Ay are also included to examine how factors like Shariah compliance moderate the impact of the COVID-19 Additionally, we conduct a correlation analysis using the natural log of digital spending as a proxy for digital innovation.
As presented in Table 3, the correlation coefficient between digital innovation and firm size is 0.
277, suggesting a modest positive associationAiconsistent with the expectation that larger firms, with greater resources, tend to invest more in digital innovation.
Similarly, the correlation between digital innovation and R&D spending is 0.
233, indicating that higher R&D investments are modestly associated with increased digital innovation.
The modest strength of these correlations may partly result from the logarithmic transformation of digital spending, which compresses the scale and potentially dampens the magnitude of observed relationships.
SAi
DIGinnov
Size
Age
ROA
RND
Vola Leverage .
Liquidity .
DebtEquity .
JIS
DIV
COVID
ISCOVID
DIVCOVID
DISCOVID
Variables .
Table 3.
Correlation Matrix Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 Event window Low-ethical compl.
High-ethical compl.
Figure 1.
Cumulative Abnormal Return Trend Building on these insights.
Figure 1 provides a visual depiction of market responses around the event date.
Figure 1 represents CARs for the 60 days before and after the event date.
As shown in the figure, the trendline rises initially and then falls around the announcement date.
Notably, the downward trend in CAR is more pronounced 16 days after the event date .
, coinciding with the socalled Aucollapse periodAy when the COVID-19 pandemic severely impacted global financial markets.
Conversely, an upward trend in CARs emerges 50 days after the event date.
This revival likely reflects a stock market anomaly triggered by the announcement of economic stimulus and tax incentives by the Indonesian government and Bank Indonesia at the end of March 2020 (Phan & Narayan, 2020.
Sinaga et al.
The subsequent market response is further evidenced by a significant influx of new investors, particularly middle- and high-income individuals investing via digital applications (Modjo & Santoso, 2022.
Wahyono, 2.
Moreover, the interaction between Shariah compliance and digital innovation offers a unique pathway to resilience during crises.
Digital tools can amplify the benefits of Shariah-compliant practices by enhancing operational efficiency, transparency, and customer trust (Alsaghir, 2023.
Demirdyen, 2.
For instance, blockchain technology provides an immutable and transparent record of financial transactions, ensuring that firms adhere to Shariah principles such as the prohibition of interest .
and unethical practices (Hassan et al.
, 2.
By embedding Shariahcompliance verification into blockchain systems, firms can build greater trust among investors and stakeholders, particularly those prioritizing ethical investments.
In addition to enhancing transparency, digital innovation enables firms to extend the operational benefits of Shariah compliance.
For example.
Islamic banks have leveraged artificial intelligence (AI) and machine learning to offer personalized financial services while adhering to Shariah principles.
Robo-advisors tailored to Shariahcompliant portfolios provide automated, low-cost investment solutions that align with Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Islamic values, significantly improving customer satisfaction and expanding access to ethical investment opportunities (Yu & Alsaud, 2.
These innovations strengthen the market positioning of Shariah-compliant firms, particularly in competitive financial IV.
EMPIRICAL RESULTS
Baseline Regression The baseline Difference-in-Differences (DID) regression results presented in Table 4 reveal significant findings on the impact of Shariah compliance (JIS) and digital innovation (DIV) during the COVID-19 pandemic on firm stock performance (CAR).
Notably.
Shariah-compliant firms demonstrated greater resilience, as evidenced by the significantly positive coefficient of JISyCOVID in both the collapsed .
and post-collapsed windows .
This suggests a higher average CAR than noncompliant firms, even after accounting for other factors.
These findings align with previous research discussed in Section 2 on the resilience of Shariah-compliant firms during crises.
Although Shariah-compliant firms may have had lower CARs before COVID, indicated by the negative and significant JIS coefficients, several possible explanations exist.
These reasons include industry concentration in lower-growth sectors, investment limitations in specific activities (Dharani et al.
, 2.
, and an investor base that prioritizes long-term value and ethical considerations (Salvi et al.
Table 4.
Baseline DID Regression Dependent variable:
Cumulative Abnormal
Return (CAR) Collapsed Window
JISyCOVID
0151***
Post-collapsed .
854*** Size
Age
ROA
RND
3989***
7655***
2171***
2375***
042***
0456***
058***
3942***
5898***
0074***
1646***
0857***
2961***
5186***
DIV
COVID
Post-collapsed 0176*** DIVyCOVID
JIS
Collapsed Window
1576***
115***
3195***
0033***
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 Table 4.
Baseline DID Regression (Continue.
Dependent variable:
Cumulative Abnormal
Return (CAR) Collapsed Window
Vola
2958***
959***
0557***
8342***
Yes Yes Leverage Liquidity _cons Firm dummies Day-period dummies Observations R-squared .
Collapsed Window
2569***
0186***
0935***
Yes
Yes
047***
1302***
0423***
5277***
Yes Yes Post-collapsed Post-collapsed .
4099*** 0202*** 7018*** Yes Yes Robust standard errors are in parentheses.
*** p<.
01, ** p<.
05, * p<.
Similarly, the positive and significant coefficient for DIVyCOVID in both windows suggests that firms that implemented digital innovation during COVID saw a positive impact on their stock performance.
Interestingly, the coefficients for DIVyCOVID are higher than those for JISyCOVID across both windows.
This finding suggests that digital innovation had a stronger positive impact on stock performance than Shariah compliance during this turbulent period.
Furthermore, the positive and significant coefficient for DIV in the collapsed window suggests a slightly higher average CAR for firms that implemented digital innovation during COVID.
These results could be an early indication of the benefits of digitalization.
However, this effect disappears in the post-collapsed window, indicating a possible delayed impact.
Possible reasons for this delayed effect include initial financial difficulties, as suggested by Chen et al.
, who argue that firms undergoing digital transformation might face initial financial challenges, negatively affecting traditional metrics like ROA and ROE.
Their idea aligns with the findings of Nasiri et al.
, who highlight the importance of effective performance measurement systems in translating digital capabilities into financial outcomes.
Additionally, as noted by Jardak & Ben Hamad .
, while digital maturity might initially negatively impact traditional financial metrics, it can positively affect TobinAos Q, capturing the long-term value-creation potential of digital transformation.
This suggests that the full benefits of digital innovation on stock performance might take time to materialize.
The control variables, essential for our modelAos validity, have expected signs and significance levels.
Larger firm size, higher liquidity, and greater R&D intensity all had positive coefficients, indicating that these characteristics played a significant role in firm survival during the crisis.
These findings are consistent with prior research (Albuquerque et al.
, 2020.
Demers et al.
, 2021.
Li et al.
, 2.
, further validating our studyAos results.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Overall, our baseline analysis confirms the hypotheses H1 & H2, underscoring the crucial role of Shariah compliance and digital innovation in firm performance during These findings have significant implications for understanding firm resilience and the potential benefits of digital transformation, particularly in times of crisis.
Parallel Trend Test A critical assumption of the Difference-in-differences (DID) model is that control and treatment groups exhibited similar pre-event trends in stock performance before the COVID-19 pandemic .
he AueventA.
This assumption is crucial because it isolates the impact of COVID-19 on the treatment group .
irms with a specific characteristic such as Shariah compliance or digital innovatio.
Observed means Cummulative Abnormal Return Non-Shariah Shariah compliance Figure 2.
Graphical Diagnostics for Parallel Trends Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 Observed means Cummulative Abnormal Return Control Digital innovative Arms Figure 2.
Graphical Diagnostics for Parallel Trends (Continue.
Figure 2 visually assesses this assumption using a parallel trend test.
It plots the average Cumulative Abnormal Returns (CAR) for both Shariah-compliant firms and their control group, as well as digitally innovative firms and their control group.
The key finding from Figure 2 is the matching pre-event CAR dynamics for both comparisons.
In simpler terms, the lines for the control and treatment groups show similar fluctuations in CAR before the event date .
arked in the figur.
This suggests that no significant pre-COVID-19 events disproportionately impacted one group compared to the other.
Thus, these results strenghten the validity of this studyAos parallel trend assumption for the DID model.
The Moderating Effect of Digital Innovation We extend our analysis by employing a triple-difference regression (Equation .
to examine the moderating effect of digital innovation (DIV) on Shariah compliance (JIS) during the COVID-19 pandemic.
This analysis aims to determine whether digital innovation enhances the resilience of Shariah-compliant firms.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Table 5.
Triple Differences Regression Results Dependent variable: Cumulative Abnormal Return (CAR) JISyDIVyCOVID
JISyCOVID
DIVyCOVID
DIVyJIS
Size
Age
ROA
RND
Vola Leverage Liquidity Control variables Firm dummies Day-period dummies Observations R-squared Collapsed Window Post-collapsed .
03*** .
9867***
Yes
Yes
Yes
037***
2487***
0865***
3368***
2929***
0187***
Yes Yes Yes Robust standard errors are in parentheses *** p<.
01, ** p<.
05, * p<.
The results in Table 5 present significant and positive coefficients for JISyDIVyCOVID in both the collapsed .
and post-collapsed windows .
indicating a positive moderating effect of digital innovation on Shariah compliance.
These suggest that firms that were both Shariah-compliant and adopted digital innovation during COVID-19 experienced an even greater positive impact on their stock performance (CAR) compared to firms with only one of these characteristics.
These results highlight the potential of digital innovation to strengthen the resilience of Shariah-compliant firms during times of crisis.
Furthermore, the positive and significant coefficient for JISyCOVID in the postcollapsed window .
provides additional evidence that Shariah-compliant firms demonstrated greater resilience during the crisis.
However, the coefficient in the collapsed window .
is insignificant, suggesting a possible delayed effect of Shariah compliance on stock performance.
As noted by Wahyono .
, this delayed positive Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 impact may stem from government incentives, such as tax benefits for Shariah-compliant firms during crises, which were only announced after the collapsed window.
These incentives likely enhanced the attractiveness of Shariah-compliant firms to investors, thereby boosting their performance.
The positive and significant coefficients for DIVyCOVID in both windows .
030 and 0.
further confirm the beneficial impact of digital innovation on stock performance during the pandemic, consistent with the initial analysis.
Additionally, the coefficients for most control variables align with expectations.
Firm size, volatility, leverage, and liquidity significantly influence CAR, with size and liquidity exerting positive effects, while volatility and leverage have negative effects.
These findings support the hypotheses that both Shariah compliance and digital innovation contribute to enhanced stock performance during crises.
Notably, the positive and significant triple interaction term (JISyDIVyCOVID) highlights the moderating effect of digital innovation, indicating that Shariah-compliant firms that adopted digital transformation during COVID-19 experienced an even greater positive impact on their stock performance.
Analyzing the Mechanism: The Moderating Effect of Financial Constraints Building on the established link between Shariah compliance, digital innovation, and stock performance during COVID-19 (Tables 4 & .
, this section explores the underlying mechanism driving this association, focusing on financial constraints.
To measure financial constraints, we use the Size-Age Index (SAI) as the dependent variable, a widely adopted proxy for firmsAo financing limitations (Hadlock & Pierce, 2010.
Whited & Wu, 2.
Table 6.
Financial Constraints as Mechanism Dependent variable:
Size-Age Index (SA.
JISyCOVID Collapsed Window Post-collapsed .
3219*** Size
Age
ROA
000***
4432***
3993***
2832***
0031***
0365***
000***
7896***
394***
7359***
0967***
0033***
7373***
2777***
1074***
0727***
DIV
COVID
Post-collapsed 0024*** DIVyCOVID
JIS
Collapsed Window
0031***
7391***
2615***
1131***
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Table 6.
Financial Constraints as Mechanism (Continue.
Dependent variable:
Size-Age Index (SA.
RND
Vola
Leverage Liquidity _cons Firm dummies Day-period dummies Observations R-squared Collapsed Window
129***
0***
2135***
007***
7895***
Yes
Yes
Collapsed Window
0005***
0861***
0332***
0018***
2776***
Yes
Yes
0221***
0***
1742***
0008***
496***
Yes Yes Post-collapsed Post-collapsed .
0002*** 0576*** 0327*** 0021*** 1722*** Yes Yes Robust standard errors are in parentheses.
*** p<.
01, ** p<.
05, * p<.
Table 6 presents the results, showing that the coefficient for COVID is negative and significant only in the post-collapsed window, suggesting that financial constraints became more pronounced as the economic downturn persisted.
This finding aligns with prior research indicating that while firms may initially rely on internal liquidity buffers or short-term credit access during a crisis, prolonged economic disruptions increase financing difficulties over time (Espinosa-Myndez et al.
, 2023.
Hu, 2023.
Zhang et al.
, 2.
Shariah compliance (JIS) and digital innovation (DIV) exhibit different impacts on financial constraints across the two periods.
In the collapsed window, neither JIS nor DIV significantly affects SAI, suggesting that these factors do not immediately alleviate financial constraints at the peak of the crisis.
This result is consistent with the notion that in the early stages of a financial crisis, heightened uncertainty limits firmsAo ability to leverage their compliance status or technological capabilities for financial relief (Beck et al.
, 2013.
Hasan & Dridi, 2011.
Md.
Hasan et al.
Additionally, the strong governance and financial discipline associated with Shariah-compliant firms likely enhance investor and lender confidence, contributing to improved financing opportunities during the recovery period (Ramadani, 2.
Similarly, digital innovation (DIV) significantly reduces financial constraints in the post-collapsed window, suggesting that firms investing in digital transformation are better positioned to adapt and improve their financial health over time.
This finding aligns with Dynamic Capabilities Theory (Teece et al.
, 1.
, which posits that firms that develop and deploy technological capabilities can reconfigure resources to respond to external shocks, leading to long-term resilience (Krishnan et al.
Wu et al.
, 2.
While digital innovation requires high initial investment.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 it enhances efficiency, market reach, and cost management, ultimately improving firmsAo financial standing.
Moreover, the interaction terms JISyCOVID and DIVyCOVID are positive and significant in the post-collapsed window, confirming that digital innovation amplifies the positive influence of Shariah compliance on financial constraints.
This suggests that firms combining strong ethical governance with technological advancements are better positioned to maintain financial stability.
Prior research highlights that digital tools improve transparency and accountability, reinforcing investor confidence in firms with strong ethical foundations (Hassan et al.
, 2022.
Hooda et al.
, 2.
These findings indicate that in the later stages of the pandemic.
Shariah-compliant firms benefit from gradually implemented financial support measures, reducing financial constraints.
Meanwhile, digital innovation, though initially financially burdensome, ultimately enhances firmsAo financial resilience, underscoring the importance of long-term investment in technology.
Overall, the results suggest that financial constraints play a critical role in the relationship between Shariah compliance, digital innovation, and stock performance.
Shariah compliance helps alleviate financial constraints, while digital innovation, despite presenting initial financial challenges, ultimately strengthens firmsAo financial position.
Additionally, digital innovation enhances the financial stability of Shariah-compliant firms, reinforcing the importance of integrating both factors for long-term sustainability.
Robustness Checks To solidify the credibility of our results and address potential concerns about the chosen measures and timeframe, we conduct two robustness tests (Tables 7 and .
These tests ensure that our conclusions are independent of specific methodological Alternative Measure of Shariah Compliance Our primary analysis utilizes the JII index to quantify Shariah compliance.
However, to confirm that our findings are not specific to this measure, we conduct a robustness test using the JII70 index as an alternative indicator (Table .
The JII70 index incorporates stricter criteria for Shariah-compliant firms, potentially offering a more refined measure.
By replicating the DID regression with JII70, we achieved two key objectives:
A Proxy Independence: We verify that our conclusions hold regardless of the specific Shariah compliance measure used.
This strengthens the generalizability of our results and reduces the risk that a particular indexAos idiosyncrasies drive the results.
A Confirmation of Positive Effect: If the positive impact of Shariah compliance on stock performance persists with the stricter JII70 index, it increases our confidence that this relationship is genuine and not an artifact of the chosen measure.
Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 Table 7.
JIS 70 DID Regression Dependent variable:
Cumulative abnormal return (CAR) Collapsed Window Postcollapsed .
JIS70yCOVID
0231***
0227***
DIVyCOVID
JIS70
0714***
Size
Age
ROA
RND
Vola Leverage Liquidity _cons Firm dummies Day-period dummies Observations R-squared 392*** 0389*** 0527*** 8328*** 035*** 0267*** 6701*** Yes Yes Postcollapsed .
042*** 0456*** 058*** 3942*** 5898*** 0074*** 047*** 1302*** 0423***
5277***
Yes
Yes
1646***
0857***
2961***
4099***
0202***
7018***
Yes
Yes
448***
DIV
COVID
Collapsed Window
1632***
0985***
3076***
0031***
1033***
0201***
7646***
Yes Yes Robust standard errors are in parentheses.
*** p<.
01, ** p<.
05, * p<.
As expected.
Table 7 displays a positive coefficient for JIS70yCOVID.
This reinforces our initial findings, indicating that Shariah-compliant firms .
s measured by JII.
exhibit greater resilience during the crisis window.
Additionally, the positive effect on digital innovation (DIV) remains significant in this robustness test.
Extended Window Analysis The primary analysis uses standard CAR windows to focus on a specific timeframe around the COVID-19 event.
However, the impact of a major event like a pandemic Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025 might not be fully captured within a short window.
We conduct a robustness test to address this concern using an extended window period of [-90, .
days around the COVID-19 event (Table .
This extended window allows us to capture potential delayed effects that might not be evident in the shorter timeframe used for CAR Table 8.
DID and Triple Difference Regression for Extended Window Dependent variable:
Cumulative abnormal return
(CAR)
JIS70yDIVyCOVID
JIS70yCOVID
Extended Window
Extended Window
Extended Window
0236***
0353***
011***
DIVyCOVID
JIS70
DIV
042***
058***
DJIS70
COVID
Firm dummies Day-period dummies 1212*** 0607*** 259*** 0034*** 8198*** Yes
Yes
3942***
5898***
0074***
047***
1302***
0423***
5277***
Yes
Yes
Observations R-squared Size
Age
ROA
RND
Vola Leverage Liquidity _cons Robust standard errors are in parentheses *** p<.
01, ** p<.
05, * p<.
0617***
1529***
2465***
0032***
8729***
Yes Yes Weathering the Storm: Shariah Compliance.
Digital Innovation, and Stock Performance During COVID-19 The results in Table 8 continue to support our initial findings.
Shariah compliance (JIS.
and digital innovation remain crucial for stock performance during Notably, the positive effects of these factors become more pronounced in the extended window analysis.
This suggests that the long-term benefits of digital innovation for Shariah-compliant firms may take time to materialize.
In summary, the robustness checks validate our initial findings, emphasizing the importance of Shariah compliance and digital innovation for firm performance during crises.
Shariah compliance and digital innovation function as complementary safeguards, enhancing stock market resilience and fostering longterm value creation.
CONCLUSIONS AND RECOMMENDATIONS
Our study for Indonesia explores the link between Shariah compliance, digital innovation, and stock performance during the COVID-19 pandemic.
The findings suggest that both characteristics act as safeguards, enhancing firmsAo resilience during crises.
Shariah compliance is associated with improved stock performance during the crisis window, likely due to access to alternative financing channels and robust risk management practices.
Digital innovation shows a positive longterm impact, indicating that investments in digital transformation require time to yield benefits.
Financial constraints play a crucial mediating roleAiwhile digital innovation may initially exacerbate these constraints, it ultimately contributes to improved financial health.
In contrast.
Shariah compliance appears to alleviate financial constraints during turbulent periods.
Based on these insights, we offer several practical and feasible First, practitioners should actively combine Shariah-compliant practices with targeted digital innovation initiatives to build a resilient operational Recognizing that digital transformation is a long-term investment, firms are encouraged to adopt a phased implementation strategy, allowing for gradual integration and continuous refinement.
Second, firms should develop financial strategies to mitigate the short-term costs associated with digital innovation, while regulatory bodies should refine frameworks to support digital innovation and Shariah compliance, fostering a more stable and resilient financial market.
Third, establishing clear guidelines that assist firms in aligning their digital transformation efforts with Shariah compliance can ensure sustainable growth.
Implementing incentivization programs or alternative financing options could alleviate initial financial constraints and further encourage investment in digital innovation.
Lastly, future research directions could extend studies to diverse geographical regions to validate and generalize these findings across different market Conducting detailed case studies on digital transformation initiatives within Shariah-compliant firms could provide best practices and critical success Additionally, exploring the heterogeneity in firmsAo capabilities regarding Shariah compliance and digital readiness may offer deeper insights into their differential impacts on stock performance.
Despite certain limitations, our findings provide valuable insights into how firms can strategically integrate Shariah compliance and digital innovation to enhance resilience and long-term financial stability.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 2, 2025
ACKNOWLEDGMENT
This research is funded by HIBAH Penelitian International BINUS University 2024 (BINUS International Research Grant 2.
The authors would like to express their sincere gratitude to BINUS University for the support and funding provided.
REFERENCES