From Ethical Principles to Financial Decision Theoretical Foundations and Empirical Comparison with Conventional Banks of Islamic Banks Capital Structure
28 Pages Posted: 19 Sep 2012 Last revised: 26 Jun 2023
Date Written: June 8, 2012
Abstract
The aim of this research is to analyze consequences of the consideration of ethical principles in the financial decisions process of banks. More specifically we study how the consideration of Shariah principles could affect the capital structure of Islamic Banks. We first apply concepts and reasoning of classical theories of capital structure (trade-off theory, pecking order theory, agency theory) in the specific context of Islamic Banks. We then study empirically differences between Islamic and conventional banks capital structure and its traditional determinants. Our sample is made of Islamic and conventional banks, resulting in a panel of 113 banks (with 44 of the Islamic) over the period 2005-2010. We run panel data regressions showing that the sign of the impact of traditional determinants on capital structure is the same for Islamic and conventional banks but the impact is greater in absolute value for the first group. Moreover the fact to be Islamic has a strong significant positive effect on the equity to total asset ratio. This result means that variables specific to Islamic banks not taken into account by traditional theory explain why these banks have a higher equity to capital ratio.
Keywords: Islamic banking, capital structure theory, agency theory, pecking order theory, trade-off theory
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