DOES THE CHOICE OF FINANCING AFFECT THE ISLAMIC FINANCIAL SYSTEM DESIGN?

Abstract

This paper evaluates financing choice of the firms issuing equity or debt under the design of the Islamic financial system.  It includes a dynamic model where the dependent variable is a dichotomous observation.  The assumption that shareholders can enforce shareholder value maximization is definitely true for the conventional firms. In this paper, we study the financing choice for the Sharia firms in Malaysia. These firms are particularly interesting because shareholders are able to share profit and loss with entrepreneurs that peculiar in Islamic financial system. This makes it appealing to compare the outcomes of studies on the motives for the financing choice and studies that investigate the profit-loss sharing effects that are associated with this choice.  By estimating the unbalanced panel data cover a sample of 385 firms and balanced data cover a sample of 342 firms, for the year 1994 to 2001, listed in the Syariah Board of Kuala Lumpur Stock Exchange, the study evaluates the financing choice with the presence of profit and loss sharing variable.

JEL classification: G32;

Keywords: capital structure; agency cost; bankruptcy cost; profit loss sharing; Islamic financial system design;