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Islamic Finance and the Theory of Capital Structure

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  • Nagano, Mamoru

Abstract

This paper empirically investigates firms using Islamic finance in Malaysia and Middle East countries. The comparative analysis of Islamic finance and non-Islamic finance users resulted in three major implications. First, Islamic bond issuers preferentially choose the Islamic bond issuance prior to bank borrowing and other external financing tools. Second, Islamic bond issuance is not related to the issuer’s internal funds, while Islamic bank borrowing is significantly influenced by the magnitude of a firm’s internal funds. These results suggest that Islamic bond issuers do not always choose to issue bonds based on information cost, but Islamic bank borrowers always do. Third, the Islamic bond issuance contributes to an increase in the issuer’s stock returns and total factor productivity. This empirical result suggests that Islamic bond issuance is preferred because of this unique benefit which standard external financing does not have.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24567.

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Date of creation: 02 Jan 2010
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Handle: RePEc:pra:mprapa:24567

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Keywords: Capital Structure; Bond Issuance; Islamic Finance;

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References

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  1. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
  2. Timur Kuran, 2004. "Why the Middle East is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 71-90, Summer.
  3. Graff Zivin Joshua & Small Arthur, 2005. "A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-21, May.
  4. Heinkel, Robert & Kraus, Alan & Zechner, Josef, 2001. "The Effect of Green Investment on Corporate Behavior," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 431-449, December.
  5. Luca Errico & Mitra Farahbaksh, 1998. "Islamic Banking," IMF Working Papers 98/30, International Monetary Fund.
  6. Aggarwal, Rajesh K & Yousef, Tarik, 2000. "Islamic Banks and Investment Financing," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(1), pages 93-120, February.
  7. Ang, James S & Chua, Jess H & McConnell, John J, 1982. " The Administrative Costs of Corporate Bankruptcy: A Note," Journal of Finance, American Finance Association, American Finance Association, vol. 37(1), pages 219-26, March.
  8. Kuran, Timur, 2005. "The logic of financial westernization in the Middle East," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 593-615, April.
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Cited by:
  1. Hanifa, Mohamed Hisham & Masih, Mansur & Bacha, Obiyathulla, 2014. "Testing Sukuk And Conventional Bond Offers Based On Corporate Financing Theories Using Partial Adjustment Models: Evidence From Malaysian Listed Firms," MPRA Paper 56953, University Library of Munich, Germany.

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