Corporate governance as a market signal in sharia stock pricing: evidence from Jakarta Islamic Index 70

Abstract

Purpose – This study aims to analyse the effect of corporate governance on sharia stock prices in the Jakarta Islamic Index 70 (JII 70), a benchmark index of the 70 most liquid sharia-compliant stocks on the Indonesia Stock Exchange (IDX). Method – The research investigates five governance mechanisms (CEO duality, executive turnover, independent auditor, institutional ownership, and executive compensation) with ROA and firm age as control variables. A quantitative approach uses panel data regression on 115 companies from 2019 to 2023. The Fixed Effects Model (FEM) was selected as the best model, and a robustness test with Tobin's Q confirmed the stability of the relationships. Findings – The findings reveal that CEO duality and independent auditor positively affect stock prices, while executive compensation has a negative effect. Executive turnover and institutional ownership show no significant impact. Implications – These results support signalling theory, indicating that good governance sends positive signals to investors, enhancing trust in sharia-compliant firms. Practically, this study aids sharia investors in evaluating governance mechanisms and assists regulators in enhancing market transparency.