The Impact of Profit-Sharing Investment Accounts on Shareholders' Wealth

Ken Baldwin, Maryam AlHalboni

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Abstract

This study evaluates the impact of profit-sharing investment accounts (PSIAs) on shareholders’ wealth. Using probabilistic tools, we derive an explicit formula for PSIA value. We apply this formula to calculate account values for a sample of 52 banks in 13 countries and determine an empirical rank order of value-drivers. We also assess the impact of returns’ smoothing schemes on shareholders’ wealth, namely the use of reserves and/or subsidies to adjust cash returns to investment account holders. We find that the value of PSIAs varies widely amongst banks, and that originating high-quality assets dominates returns’ smoothing in the value creation process. We also find that if subsidies are used without reserves to smooth returns, then shareholders’ wealth is destroyed in the long term for 77% of banks in our sample. This finding supports the practice of prioritising reserves over subsidies to smooth returns.
Original languageEnglish
Article number101253
JournalJournal of International Financial Markets, Institutions and Money
Volume69
Early online date24 Sep 2020
DOIs
Publication statusPublished - Nov 2020

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Financial Markets, Institutions and Money. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Financial Markets, Institutions and Money 69, (2020) DOI: 10.1016/j.intfin.2020.101253

© 2020, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

  • Islamic banking
  • Profit-sharing investment accounts
  • Smoothing
  • Valuation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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