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Does PLS financing solve asymmetric information problems?

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  • Ouidad Yousfi

    () (MRM - Montpellier Research in Management - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - UM1 - Université Montpellier 1 - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier)

Abstract

Discussion of Islamic private equity (PE) financing modes rarely provides detailed analytical insights into their properties: there is no rigorous analysis of their features. The current paper analyzes how and when Profit Loss Sharing (PLS) financing methods can solve asymmetric information problems. I focus on Mudarabah and Musharakah financing schemes and consider agency models under moral hazard. The model shows some interesting results. First, I show that Mudarabah financing provide powerful incentive schemes to the entrepreneur. As the Islamic PE fund is not actively involved in the project and the project success depends on the entrepreneur's effort, it leads to the first best solution. Second, my results provide evidence that Musharakah financing cannot solve moral hazard problem. One explanation could be the fact that the project is jointly funded by the two parties and that both of them provide non-contractible efforts which diminish their incentives.

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  • Ouidad Yousfi, 2013. "Does PLS financing solve asymmetric information problems?," Post-Print hal-00785325, HAL.
  • Handle: RePEc:hal:journl:hal-00785325
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00785325
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    References listed on IDEAS

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    14. Ouidad Yousfi, 2012. "Leveraged Buy Out: Does the arrival of new targets increase the agents' incentives?," Post-Print hal-00813910, HAL.
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    Cited by:

    1. Adil EL Fakir & Mohamed Tkiouat, 2016. "Single or Menu Contracting: A Game Theory Application of the Hersanyi Model to Mudaraba Financing," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 221-230.

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    Keywords

    incentives; Islamic private equity; PLS principle; Moral hazard; Shari'ah; incentives.;

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