Profitability and Firm Size Drive Sharia Stock Returns in Indonesia, Study Finds
A recent study by Mohamad Tohir and colleagues from Universitas Islam Negeri (UIN) reveals that profitability and company size play a decisive role in shaping stock returns among firms listed in the Indonesian Sharia Stock Index (ISSI). Published in 2026 in the International Journal of Contemporary Sciences (IJCS), the research highlights how financial performance indicators directly influence investor outcomes in Indonesia’s growing Islamic capital market.
The findings matter as Indonesia continues to expand its sharia-compliant financial ecosystem. With increasing participation from both domestic and global investors, understanding what drives returns in Islamic stocks has become essential for policymakers, financial institutions, and market participants.
Rising Importance of Sharia-Compliant Investments
Indonesia hosts one of the world’s largest Muslim populations, making it a key market for Islamic finance. Over the past decade, the Indonesian Sharia Stock Index has grown steadily, offering investors alternatives aligned with Islamic principles such as the prohibition of interest (riba) and speculative practices.
Despite this growth, many investors still rely on conventional metrics when evaluating sharia stocks. This creates a gap in understanding how traditional financial indicators—such as profitability and firm size—operate within a sharia-compliant framework.
The study by Mohamad Tohir and his team addresses this gap by examining whether these factors significantly affect stock returns in ISSI-listed companies.
Methodology: Financial Data from Sharia Index Companies
The research uses a quantitative approach to analyze financial data from companies included in the Indonesian Sharia Stock Index over a multi-year period.
Key aspects of the methodology include:
- Research design: Quantitative explanatory analysis
- Data source: Financial statements of ISSI-listed companies
- Variables analyzed: Profitability (measured by return on assets), company size, and stock returns
- Analytical tool: Statistical regression analysis
This approach allows the researchers to identify direct relationships between company fundamentals and market performance without relying on complex technical assumptions.
Key Findings: Profitability and Size Matter
The study delivers clear and actionable insights for investors and financial analysts:
1. Profitability Has a Strong Positive Effect on Stock Returns
Companies with higher profitability levels consistently generate better stock returns.
- Firms with strong return on assets (ROA) attract more investor interest
- Higher earnings signal efficient management and sustainable business performance
- Investors tend to reward profitable companies with higher stock valuations
2. Company Size Positively Influences Returns
Larger companies tend to deliver more stable and attractive returns compared to smaller firms.
- Large firms benefit from stronger market positioning
- They have better access to capital and resources
- Their operations are generally more resilient to economic fluctuations
3. Combined Effect Strengthens Investor Confidence
When profitability and company size are both strong, the impact on stock returns becomes more significant.
- Investors perceive these companies as lower risk
- Market confidence increases, leading to higher demand for shares
Why These Findings Matter for Islamic Finance
The research confirms that fundamental financial indicators remain highly relevant in Islamic capital markets. Even within a sharia-compliant framework, investors still prioritize profitability and scale when making decisions.
According to Mohamad Tohir from Universitas Islam Negeri, financial performance remains the core driver of investor behavior, regardless of whether the market operates under conventional or Islamic principles.
This insight reinforces the idea that Islamic finance does not replace traditional financial logic but complements it with ethical guidelines.
Real-World Implications
The findings offer practical value for multiple stakeholders:
For Investors
- Focus on companies with strong profitability metrics
- Consider firm size as a stability indicator
- Use financial fundamentals alongside sharia compliance screening
For Companies
- Improve operational efficiency to boost profitability
- Scale business operations to enhance market confidence
- Maintain transparency in financial reporting
For Policymakers
- Strengthen financial literacy in Islamic investing
- Encourage disclosure standards for sharia-listed firms
- Support the growth of large, competitive Islamic corporations
For Financial Institutions
- Develop investment products based on profitability and firm size metrics
- Provide advisory services tailored to sharia-compliant portfolios
Broader Impact: Strengthening Indonesia’s Islamic Capital Market
Indonesia aims to become a global hub for Islamic finance. Studies like this provide the empirical foundation needed to build a more robust and transparent market.
By identifying key drivers of stock returns, the research helps:
- Improve investor decision-making
- Increase market efficiency
- Attract international investment
It also supports the long-term sustainability of the Indonesian Sharia Stock Index by aligning financial performance with ethical investment principles.
Author Profile
- Mohamad Tohir, M.E. – Lecturer and researcher at Universitas Islam Negeri, specializing in Islamic finance and capital markets
- His research focuses on stock market behavior, financial performance analysis, and the development of sharia-compliant investment frameworks
Mohamad Tohir is actively involved in advancing research on Indonesia’s Islamic financial system and contributes to policy discussions on sustainable finance.
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