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

Ken Baldwin; Maryam AlHalboni

doi:10.1016/j.intfin.2020.101253

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

Ken Baldwin, Maryam AlHalboni

School of Economics, Finance and Accounting

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

77 Downloads (Pure)

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 language	English
Article number	101253
Journal	Journal of International Financial Markets, Institutions and Money
Volume	69
Early online date	24 Sep 2020
DOIs	https://doi.org/10.1016/j.intfin.2020.101253
Publication status	Published - 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

Access to Document

10.1016/j.intfin.2020.101253

Post-PrintAccepted author manuscript, 1.87 MBLicence: CC BY-NC-ND

Cite this

@article{063c4daa4b9e45fb8e67870653bd738f,

title = "The Impact of Profit-Sharing Investment Accounts on Shareholders' Wealth",

abstract = "This study evaluates the impact of profit-sharing investment accounts (PSIAs) on shareholders{\textquoteright} 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{\textquoteright} smoothing schemes on shareholders{\textquoteright} 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{\textquoteright} smoothing in the value creation process. We also find that if subsidies are used without reserves to smooth returns, then shareholders{\textquoteright} 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.",

keywords = "Islamic banking, Profit-sharing investment accounts, Smoothing, Valuation",

author = "Ken Baldwin and Maryam AlHalboni",

note = "NOTICE: this is the author{\textquoteright}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 {\textcopyright} 2020, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/ ",

year = "2020",

month = nov,

doi = "10.1016/j.intfin.2020.101253",

language = "English",

volume = "69",

journal = "Journal of International Financial Markets, Institutions and Money",

issn = "1042-4431",

publisher = "Elsevier",

}

TY - JOUR

T1 - The Impact of Profit-Sharing Investment Accounts on Shareholders' Wealth

AU - Baldwin, Ken

AU - AlHalboni, Maryam

N1 - 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/

PY - 2020/11

Y1 - 2020/11

N2 - 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.

AB - 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.

KW - Islamic banking

KW - Profit-sharing investment accounts

KW - Smoothing

KW - Valuation

UR - http://www.scopus.com/inward/record.url?scp=85092225348&partnerID=8YFLogxK

U2 - 10.1016/j.intfin.2020.101253

DO - 10.1016/j.intfin.2020.101253

M3 - Article

VL - 69

JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

SN - 1042-4431

M1 - 101253

ER -

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

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this