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- Title
EQUITY CAPITAL, PROFIT SHARING CONTRACTS, AND INVESTMENT: THEORY AND EVIDENCE.
- Authors
Bashir, A.; Darrat, A. F.; Suliman, M. O.
- Abstract
This article presents a two-period general equilibrium model of investment under uncertainty and symmetric information. An optimal solution for the investment model is also derived for a representative Islamic bank. It is theoretically shown that equity capital (or the financial position of the firm) and the profit-sharing ratio are among the primary determinants of investment, each of which exerts a positive effect on investment. Besides these two factors, potential effects from depreciation and the rate of inflation on the level of investment are also considered in the theoretical analysis. An alternative theoretical model is also derived whereby the profit-sharing ratio, instead of the level of investment, is treated endogenously. Both theoretical models are empirically tested against actual data for a representative Islamic bank, the Kuwaiti Finance House over the quarterly period 1978: first quarter-1988:fourth quarter. The empirical results are quite consistent with the implications of the proposed models. In particular, these results indicate that equity capital and the profit-sharing ratio have exerted significant effects upon the level of investment undertaken by the Kuwaiti Finance House. On the other hand, empirical results from the profit-sharing ratio model suggest that both equity capital and the level of investment have played an important role in determining the profit-sharing ratio over the estimation period. Therefore, contrary to the view of some critics, strong financial position and the profit-sharing ratio are strongly related to the bank's business reputation and its investment activities.
- Subjects
INVESTMENTS; ISLAMIC finance; STOCKS (Finance); CAPITAL; PROFIT-sharing; KUWAIT Finance House KSC
- Publication
Journal of Business Finance & Accounting, 1993, Vol 20, Issue 5, p639
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.1993.tb00281.x