FINANCIAL RESILIENCE IN TIMES OF CRISIS: SHARIAH-COMPLIANT VS. NON-COMPLIANT FIRMS DURING COVID-19

Abstract

This study examines whether Shariah-compliant (SC) firms exhibit greater resilience than non-compliant (NC) firms during the COVID-19 pandemic. Using panel data from 108 manufacturing firms listed on the Pakistan Stock Exchange between 2010 and 2024, we investigate the impact of firm size, sales growth, and capital structure on performance, as measured by return on assets (ROA). To evaluate resilience, we include a COVID-19 dummy variable and interaction terms to determine whether these firm characteristics mitigated or magnified the pandemic's impact. The Breusch-Pagan Lagrangian Multiplier (BPLM) and Hausman tests indicated that random effects models were the most suitable for estimation. Our results show that SC firms, due to lower leverage and a stronger reliance on ethical, asset-backed financing, were more resilient during COVID-19 than NC firms. Both firm size and sales growth enhanced performance resilience across both groups, although the impact of capital structure was more significant in NC firms. The findings highlight that Shariah compliance provides structural advantages during systemic crises. This research contributes to the resilience literature and provides valuable insights for policymakers and investors seeking to develop robust financial strategies in the face of crises.

Keywords: Financial resilience, Sales growth, Capital structure, Firm size, Shariah compliant, Non Shariah compliant, Random Effect, Fixed effect.