Religion and Ratio Analysis: Towards an Islamic Corporate Liquidity Measure

54 Pages Posted: 17 Aug 2016 Last revised: 15 Sep 2016

See all articles by Ahmed Elnahas

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

M. Kabir Hassan

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

Ghada Ismail

University of Memphis - Finance

Date Written: August 13, 2016

Abstract

This paper contributes to the emerging literature on the effect of religion on corporate decision making and financial reporting. We argue that financial statement analytical tools could violate several commands of the Islamic law. Specifically, traditional liquidity ratios imply undervaluation, uncertainty, and interest bearing aspects that are strictly prohibited in the Islamic law. We propose an Islamic-compliant measure of corporate liquidity. In order to validate our proposed ratio as a measure of corporate liquidity, we incorporate it in the traditional corporate bankruptcy prediction models. Our measure significantly improves the accuracy of the corporate bankruptcy prediction models of Altman (1968) Z-score and Ohlson (1980).

Keywords: Islamic finance, ratio analysis, corporate liquidity, bankruptcy

JEL Classification: G31, G33, M41

Suggested Citation

Elnahas, Ahmed and Hassan, M. Kabir and Ismail, Ghada, Religion and Ratio Analysis: Towards an Islamic Corporate Liquidity Measure (August 13, 2016). Emerging Markets Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2822918 or http://dx.doi.org/10.2139/ssrn.2822918

Ahmed Elnahas (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

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

Ghada Ismail

University of Memphis - Finance ( email )

United States

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