Dividend Signaling Hypothesis and Short-Term Asset Concentration in Interest-Free Banking

Islamic Economic Studies, Vol. 11, No. 1, pp. 1-25, September 2003

Posted: 24 Oct 2009

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Bashir Al-Zu'bi

University of Jordan

Date Written: 2003

Abstract

This paper finds that dividend signaling hypothesis is able to explain the phenomenon of assets concentration in short and medium investments in Islamic Interest-Free banking (IIFBs). In this paper a dividend signaling model framework has been introduced, where in the process of maintaining a stable dividend, mangers of Islamic Interest-Free banking (IIFBs) will prefer to invest in investments that have more certainty about its return, leading to a heavy use of mark-up-pricing, which in turn concentrated on short and medium investments. The empirical results are found to be consistent with the prediction of our model. Dividends in Islamic Interest-Free banking (IIFBs) are found to be stable, and bank earnings cashflow is a major source of this stability. Moreover, there is evidence that the short and medium investments are more important in generating earnings than long-term investments

Keywords: interest-free banks, dividend Policy, stability, Islamic

JEL Classification: G35, G38

Suggested Citation

Hassan, M. Kabir and Farhat, Joseph and Al-Zu'bi, Bashir, Dividend Signaling Hypothesis and Short-Term Asset Concentration in Interest-Free Banking (2003). Islamic Economic Studies, Vol. 11, No. 1, pp. 1-25, September 2003, Available at SSRN: https://ssrn.com/abstract=1493684

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

Bashir Al-Zu'bi

University of Jordan ( email )

Jordan
Amman, Amman 11942
Jordan

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