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This paper evaluates the stock performance of Islamic banks relative to their conventional counterparts during the initial phase of the COVID-19 crisis (from December 31, 2019, to March 31, 2020). Using 426 banks from 48 countries, we find that stock returns of Islamic banks were about 10-13% higher than those of conventional banks after controlling for a host of the bank- and country-level variables. This study explains the Islamic banks' superior crisis stock performance by exploring the potential role of pre-crisis bank efficiency. In a univariate analysis, we document higher non-parametric Data Envelopment Analysis (DEA) efficiency levels for Islamic banks than conventional banks in the year preceding the COVID-19 crisis. Our multivariate regressions show that the risk-adjusted DEA efficiency scores can explain crisis stock returns for Islamic banks but not conventional banks. The evidence is robust to alternative measures of stock returns, efficiency models, and other empirical strategies. Finally, we present insight on the importance of key bank characteristics in determining the stock returns of conventional banks during the crisis period.

Bank stock performance during the COVID-19 crisis: does efficiency explain why Islamic banks fared relatively better?