Dividend Signaling Hypothesis and Short-Term Asset Concentration of Islamic Interest-Free Banking
30 Pages Posted: 17 Apr 2018
Date Written: September 1, 2003
This paper finds that the dividend signaling hypothesis is able to explain the phenomenon of asset concentration in short- and medium-term investments in the Islamic interest-free banking system. To maintain a stable dividend payout, managers of Islamic banks will prefer to invest in instruments with more certain returns. This leads to concentration in short and medium term mark-up based investments. Our results show that dividends in Islamic banks are stable. Bank earnings are a major source of this stability. We also find that short- and mediumterm investments are more important in generating earnings than long-term investments.
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