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The issuance of asset securitization has been subject to a substantial debate by financial regulators and practitioners post the financial crisis of 2008. This study examines the impact of asset securitizations on the performance and financial stability of banks in a dual banking system (Islamic and conventional). Using a unique sample of international banks located in 21 countries, our results provide strong evidence that banks involved in asset securitization are generally riskier and less financially stable. When we comparatively assess the different structures of securitization conditioned on the bank type (i.e. Islamic versus conventional securitization), these two models of asset securitizations show differential effects on bank stability. Unlike conventional securitization, which is marked by significantly low bank stability, an issuance of Islamic securitization leads to lower bank risk. This evidence is prevalent among the two bank types during the financial crisis of 2008–2009 and within non-crisis years. We attribute these findings to the distinctive monitoring and the constraints included in the Islamic model of securitization. The study provides new insights into alternative structures of bank securitization, offering policy implications for regulators governing countries with dual-banking systems.

We examine the influence of both organizational and geographical religiosity, as important ethical parameters moderating a bank’s decision to securitize their assets. The study employs a unique database of banks located within countries marked by high (low) religious adherence. Our results provide evidence that different measures of religiosity affect a bank’s decision to securitize their assets: Banks located in countries with high religious adherence are less likely to engage with securitization compared to banks in countries with lower religiosity, while Islamic banks have a higher likelihood of embarking on a highly monitored model of asset securitization in contrast to conventional banks. When examining the motives underlying a bank’s decision to securitize assets, there is strong evidence that Islamic banks securitize their assets to improve their portfolio diversification, financial performance, and regulatory compliance. This study highlights the importance of considering informal ethical mechanisms, such as religiosity, at both the country and firm levels, when studying bank risk-taking and trading decisions, especially in countries with dual banking systems.

We examine the impact of religiosity on earnings quality, utilising a global sample of 1283 listed banks headquartered in 39 countries and covering the period 2002–2018. Using instrumental variables two-stage least squares regressions, we demonstrate that religiosity has a significant positive impact on banks’ earnings quality. We further show that the impact of religiosity becomes more pronounced among banks headquartered in countries where religion is an important element of national identity and in countries with weak legal protection. We show that the effects of religiosity are more intense during the global financial crisis period. Overall, these findings support the notion that high religiosity tends to reduce unethical activities by managers and can function as an alternative control mechanism for minimising agency costs. Our empirical investigation is robust to alternative model and sample specifications.

We investigate the impact of organizational religiosity on the earnings quality of listed banks in the Middle East and North Africa region. We analyze Islamic banking institutions, which operate within strict religious norms and extended accountability constraints, and compare them with their conventional counterparts during 2008–2013. We find that Islamic banks are less likely to manage earnings and that they adopt more conservative accounting policies. Based on these findings, we argue that religious norms and moral accountability constraints in these organizations have a significant impact on financial reporting quality and agency costs, which have implications for both regulators and market participants.

Prior literature has demonstrated that religiosity is associated with a reduced acceptance of unethical business practices and financial reporting irregularities. On this premise, we examine whether religiosity, conceptualized as the degree of adherence to religious norms in the geographical area where a firm’s headquarters is located, has an impact on audit firms’ pricing decisions in the US. We measure the intensity of religiosity by the number of adherents relative to the total population in a county and demonstrate that increased religious adherence operates as an institutionalized monitoring mechanism that decreases audit risk and audit costs, which is, in turn, reflected in reduced audit pricing. Additional tests suggest that the impact of religiosity on auditors’ pricing decisions is not differentiated by levels of auditor expertise but that audit fees are determined by an auditor’s relative location in a market sector and religious adherence. We conclude that religious adherence reduces the need for shareholders to bear the costs of monitoring agents, a finding which could be of importance for market participants and regulators.

In this paper, we analyze the performance persistence and survivorship bias of Islamic funds. The remarkable growth of these types of ethical funds raises the question of how non-financial attributes, including beliefs and value systems, influence performance and its persistence. A procedure commonly used in prior literature to assess persistence is the measuring of the performance of investment strategies based on past performance. In this context, we propose a refined version of this methodology that controls the cross-sectional significance of the performance of these strategies. This procedure correctly identifies whether abnormal performance is due to a dynamic investment strategy based on past performance, or whether it is obtained by investing in a particular set of mutual funds. The significance of the persistence varies depending on the time horizon (yearly/half-yearly), survivorship, or the tail of the distribution. In particular, we find that persistence only exists for the best funds, whereas for the worst funds, the results are not significant.

In our continuous and relentless endeavor to advance research in the field of Islamic finance, we present this supplement, following a highly successful one in 2014 (Abdelsalam and El-Komi 2014). This special issue expands the horizon of research on Islamic finance. For the first time, we see a good number of articles on behavioral finance and its implications for Islamic finance. Furthermore, there are now a couple of papers on financial inclusion and one paper on sovereign debt. In addition, we continue to present papers on the performance of Islamic financial institutions and capital markets. The behavioral finance papers in this supplement deal with a number of issues.

This study investigates the use of reported loan loss provisions (LLP) by investors in their valuations of banks within the Middle East and North Africa region between the years 2006 and 2011. We decompose LLP into discretionary and non-discretionary components to test for differential valuations in the two banking sectors. We use alternative criteria to define the components of LLP in banks: loan quality/size and earnings management/manipulation incentives. We employ a price-level valuation model estimated using two-stage analyses. We find that LLP has positive value relevance to investors in both banking sectors. Investors in Islamic banks price the discretionary component relatively lower than their conventional counterparts. We attribute this result to differences in product and governance structures as well as to the religious perception of Islamic banking. In both banking sectors, investors construe an increase in the non-discretionary component as irrelevant valuation information. Our results are relevant to bank regulators in showing the signalling effect of LLP to bank value and stability.

The main aim of this study is to undertake a critical examination of the ethical and developmental performance of an Islamic bank as communicated in its annual reports over a period of 28 years (1983-2010). Islami Bank Bangladesh Limited's (IBBL hereafter) ethical performance and disclosures are further analyzed through interviews conducted with the bank's senior management. The key findings include an overall increase in ethical disclosures during the study period. However, the focus on various stakeholders' needs has varied over time reflecting the evolving nature of the Islamic finance industry over the last three decades. Based on a secular economy, IBBL focused in the first two decades on the "Particular" Shariah compliance disclosure as a way of establishing its reputation and differentiating itself from conventional banks in a dual banking system. Post 2005, the ethical performance and disclosure shifted to more "Universal" disclosures such as sustainability, charity, employees, and community related disclosures signaling responsible conduct and the bank's adoption of a "wider stakeholder approach." However the bank is still failing to provide full disclosure on certain significant categories such as sources and uses of disposable income, thereby contradicting the principles of full and comprehensive disclosure and accountability. In addition, the structure of IBBL's investment portfolio reveals an overreliance on debt-based financial instruments and a shortcoming in fulfilling the developmental and social objectives of Islamic finance. This is evidenced by the "qualified" Shariah Supervisory Board reports that the bank consistently received. This research provides further evidence that Islamic banking and Finance in its current practices reflect the "global" and the "local" influences in an era dominated by global conventional finance.

This study is among the first attempts to tests for the relative differences between Islamic and conventional asset securitizations on bases of bank’s capitalization and risk (credit risk and liquidity risk) during two evidential crises, financial crisis (2007-2009) and the political crisis (2011-2012). We employ GMM estimation for uniquely constructed data for global asset securitization of commercial banks in 22 countries in the years 2003 to 2012, data of 672 global banks (4889 year-observations). We find that on average, securitized banks are less capitalized but more liquid than non-securitized banks. Islamic banks (IBs) involved in securitization hold higher quality loan portfolios and are more prudent but less liquid than securitizing conventional banks (CBs). We find no relative differences between the two sectors with respect to capitalization. Results are robust during the financial crisis. Additional tests, distinguishes between retained and non-retained interests for asset securitizations to test whether the level of control of the securitizing assets affect banks’ risk and capital adequacy. We find that non-retain interests by banks over securitization indicate significantly high prudence by banks however; this is associated with lower liquidity Our results are of importance to both local and international regulators as well as different stakeholders in banks. The bank type does not matters but the relative size of retained interests to the total issuance is that matters because it shows that there is impact on credit risk. Constrained model of IBs do not improve their liquidity though but helped with loan portfolio.

We test the impact of religiosity and ownership structure on the risk profile of banks, which issued securitisation. We employ GMM estimation using unique database on asset securitization of 672 commercial banks (4889 year-observations) in 22 countries (from 2003-2012), which have dual banking system. We find that banks with higher securitisation activity have consistently shown a riskier profile by being significantly less adequately capitalised and offering higher ratio of net loans to total assets. Controlling for bank type (Islamic and conventional banks), we find that although Islamic banks, in general, show a conservative approach towards risk by keeping higher reserves and more liquidity, banks involved in new issuance of asset securitization as still exposed to a higher risk profile. Controlling for a country religiosity shows different risk profile of banks in countries with different religiosity thresholds. Controlling for different types of bank ownership highlights an additional exposure to credit risk in addition to capital adequacy and liquidity risks. Our results emphasize the importance of identifying the impact of bank type and the religiosity/culture factors in global banking studies. Our results are of importance to both local and international regulators as well as different stakeholders in banks.

The global financial turmoil of 2007-2008 underlines the importance of understanding asset securitization, a process that allows banks to shed credit risk, fund their credit growth, and arbitrage capital requirements. Examining this ethically questionable activity has become crucial given its perceived long-term social impact. This paper examines the factors that motivate banks’ decisions to enter into asset securitization. In particular, we examine the influence of both organizational and geographic religiosity as important ethical parameters of economic choices on banks’ decisions to securitize their assets. We employ propensity scores using a unique database on asset securitization of banks in 22 countries during the period of 2003-2012. We find that both types of religiosity indicators are significantly associated with banks’ decisions to securitize. Banks located in countries with high religious importance scores show a lower likelihood to securitize. We also find that religiously adhered banks are likely to embark on a constrained model of securitization, which involves a high level of monitoring. In addition, our analysis suggests that religiously adhered banks are less likely to engage in asset securitization to reduce credit risk by shifting it to new investors. This conclusion is supported by their lower credit risk in the years before securitization. Alternatively, our results suggest that these banks embark on asset securitization to improve their financial and regulatory performance. Our study emphasizes the importance of considering religiosity as an important institutional factor and a monitoring mechanism in future global banking studies. Findings in this study are of importance to researchers, to local and international regulators, and to different stakeholders in the international banking sector.

Does political connection affect bank efficiency during both financial and political crises? This study addresses this question by adopting a two-stage approach that uses a quantile regression analysis of a unique dataset of listed banks in the Middle East and North Africa region. Our results show that political connection is a driving force behind bank inefficiency in the region. We find that the least efficient banks have the most significant association with political connections, thus supporting the bailout theory. We also find that political connections influenced the efficiency of banks during the 2008-9 global financial crisis but not during the 2011-13 regional political crisis. Our results provide new evidence on the applicability of established political connection theories in developing countries during political regime turmoil. We therefore recommend that global banking regulators and market participants scrutinize the political connections of banks more thoroughly.

PurposeThe purpose of this study is to examine dividend policies in an emerging capital market, in a country undergoing a transitional period.Design/methodology/approachUsing pooled cross‐sectional observations from the top 50 listed Egyptian firms between 2003 and 2005, this study examines the effect of board of directors' composition and ownership structure on dividend policies in Egypt.FindingsIt is found that there is a significant positive association between institutional ownership and firm performance, and both dividend decision and payout ratio. The results confirm that firms with a higher return on equity and a higher institutional ownership distribute higher levels of dividend. No significant association was found between board composition and dividend decisions or ratios.Originality/valueThis study provides additional evidence of the applicability of the signalling model in the emerging market of Egypt. It was found that despite the high institutional ownership and the closely held nature of the firms, which imply lower agency costs, the payment of higher dividend was considered necessary to attract capital during this transitional period.

PurposeThis study seeks to provide valuable new insight into the timeliness of corporate internet reporting (TCIR) by a sample of Irish‐listed companies.Design/methodology/approachThe authors apply an updated version of Abdelsalam et al. TCIR index to assess the timeliness of corporate internet reporting. The index encompasses 13 criteria that are used to measure the TCIR for a sample of Irish‐listed companies. In addition, the authors assess the timeliness of posting companies' annual and interim reports to their web sites. Furthermore, the study examines the influence of board independence and ownership structure on the TCIR behaviour. Board composition is measured by the percentage of independent directors, chairman's dual role and average tenure of directors. Ownership structure is represented by managerial ownership and blockholder ownership.FindingsIt is found that Irish‐listed companies, on average, satisfy only 46 per cent of the timeliness criteria assessed by the timeliness index. After controlling for size, audit fees and firm performance, evidence that TCIR is positively associated with board of director's independence and chief executive officer (CEO) ownership is provided. Furthermore, it is found that large companies are faster in posting their annual reports to their web sites. The findings suggest that board composition and ownership structure influence a firm's TCIR behaviour, presumably in response to the information asymmetry between management and investors and the resulting agency costs.Practical implicationsThe findings highlight the need for improvement in TCIR by Irish‐listed companies in many areas, especially in regard to the regular updates of information provided on their web sites.Originality/valueThis study represents one of the first comprehensive examinations of the important dimension of the TCIR in Irish‐listed companies.

PurposeThe purpose of this paper is to investigate the exchange rate exposure of UK non‐financial companies from January 1981 to December 2001.Design/methodology/approachThe study employs different exchange rate measures and adopts an equally weighted exchange rate. The analyses are conducted at the firm level. All analyses are conducted by regressing the firm's exchange rate exposure coefficients on its size, foreign activity variables and financial hedging proxies over the whole sample period.FindingsThe findings show that a higher percentage of UK non‐financial companies are exposed to exchange rate changes than those reported in previous studies. Generally, the results provide a stronger support for the suggested equally weighted rate as an economic variable, which affects firms’ stock returns. The results also show a high proportion of positive exposure coefficients among firms with significant exchange rate exposure, indicating a higher proportion of firms benefiting from an appreciation of the pound. Finally, the results also indicate evidence that firms’ foreign operations and hedging variables affect their sensitivity to exchange rate exposure.Practical implicationsThis study provides important implications for public policymakers who wish to understand links between policies that affect exchange rates and relative wealth effects.Originality/valueThe empirical results of this study should help investors to examine how common stock returns react to exchange rate fluctuations when making financial decisions, and prove useful for financial managers when measuring exposure to foreign exchange rate changes.

PurposeThe purpose of this paper is to examine the effect of firm size and foreign operations on the exchange rate exposure of UK non‐financial companies from January 1981 to December 2001.Design/methodology/approachThe impact of the unexpected changes in exchange rates on firms’ stock returns is examined. In addition, the movements in bilateral, equally weighted (EQW) and trade‐weighted and exchange rate indices are considered. The sample is classified according to firm size and the extent of firms’ foreign operations. In addition, structural changes on the relationship between exchange rate changes and individual firms’ stock returns are examined over three sub‐periods: before joining the exchange rate mechanism (pre‐ERM), during joining the ERM (in‐ERM), and after departure from the ERM (post‐ERM).FindingsThe findings indicate that a higher percentage of UK firms are exposed to contemporaneous exchange rate changes than those reported in previous studies. UK firms’ stock returns are more affected by changes in the EQW, and US$ European currency unit exchange rate, and respond less significantly to the basket of 20 countries’ currencies relative to the UK pound exchange rate. It is found that exchange rate exposure has a more significant impact on stock returns of the large firms compared with the small and medium‐sized companies. The evidence is consistent across all specifications using different exchange rate. The results provide evidence that the proportion of significant foreign exchange rate exposure is higher for firms which generate a higher percentage of revenues from abroad. The sensitivities of firms’ stock returns to exchange rate fluctuations are most evident in the pre‐ERM and post‐ERM periods.Practical implicationsThis study provides important implications for public policymakers, financial managers and investors on how common stock returns of various sectors react to exchange rate fluctuations.Originality/valueThe empirical evidence supports the view that UK firms’ stock returns are affected by foreign exchange rate exposure.

Recent changes in the regulatory environment of the London Stock Exchange are aimed at prohibiting selective disclosure and enhancing the credibility of reporting. Using an innovative 143-item disclosure checklist, we examine corporate Internet reporting (CIR) comprehensiveness and its determinants within this new regulatory environment. We also extend the literature linking corporate governance measures to CIR. Our findings indicate that despite this new regulatory environment, there is considerable room for improvement in CIR by London-listed companies. For example, our sample companies provide only 58 percent and 70 percent, respectively, of the credibility and usability items assessed by our comprehensiveness index. After controlling for size, profitability, industry, and high growth/intangibles, we find the CIR comprehensiveness of London-listed companies is associated with analyst following, director holding, director independence, and CEO duality. Because prior research indicates the U.K. leads Europe in Internet reporting, our results may shed light on how CIR will evolve throughout Europe.

Significant changes in accounting disclosure are observed in periods of economic change such as those relating to emerging capital markets and programs of privatization. Measurement of the level of accounting disclosure should ideally be designed to capture the complexity of change in order to give insight and explanation to match the causes and consequences of change. This paper shows the added interpretive value in subdividing the disclosure checklist to reflect the requirements of national accounting regulations, the location of disclosure items in the annual report, and limitations on the availability of regulations in official translation to the local language. Defining targeted disclosure categories leads to significance testing of specific aspects of changes in accounting disclosure in the Egyptian capital market in the 1990s. Strong correlation of disclosure with the presence of majority government ownership of the company and the relative activity of share trading supports the applicability of political costs and capital need theories, respectively. The relation between International Accounting Standards (IASs) disclosure and the type of audit firm points to additional theoretical explanations, including relative familiarity with the legislation and compliance features identifiable with the emerging capital market. The approach described in this paper has the potential for enhancing understanding of the complexity of accounting change in other emerging capital markets and developing economies.

This study is an examination of the timeliness of corporate internet reporting by U.K. companies listed on the London Stock Exchange (LSE). The research examines the significance of several corporate governance and firm-specific characteristics as potential determinants of the timeliness of corporate internet reporting. Our primary analysis provides evidence of a significant association between timely corporate internet reporting and the corporate governance characteristics of board experience and board independence. Our findings provide evidence that boards with less cross directorships, more experience in terms of the average age of directors, and lower length in service for executive directors provide more timely corporate internet reporting. We find that board independence is negatively associated with timely corporate internet reporting. Follow-up analysis provides additional evidence of a significant association between the timeliness of corporate internet reporting and board experience. The evidence indicates that role duality and block ownership are associated with less timely corporate internet reporting. Our findings also reveal strengths and weaknesses in the Internet reporting of U.K. listed companies. Companies need to voluntarily focus on improving the timeliness dimension of their corporate internet reporting so that the EU and U.K. accounting regulators do not replace recommendations with regulations. © 2007 Elsevier Inc. All rights reserved.

The purpose of this study is to assess the effect of relative familiarity and language accessibility on the International Accounting Standards (IASs) disclosures when IASs are first introduced in an emerging capital market. The study focuses on the annual reports of listed non-financial companies in Egypt when IASs were first introduced. The method used applies a disclosure index measurement to a sample of listed company annual reports and evaluates relative compliance with IASs in relation to corporate characteristics. The results show that for relatively less familiar requirements of IASs, the extent of compliance is related to the type of audit firm used and to the presence of a specific statement of compliance with IASs. A lower degree of compliance with less familiar IASs disclosure is observed consistently across a range of company characteristics. Consideration of agency theory and capital need theory would lead to prior expectation of a distinction in disclosure practices between different categories of companies. The results were, therefore, counterintuitive to expectations where the regulations were unfamiliar or not available in the native language, indicating that new variables have to be considered and additional theoretical explanations have to be found in future disclosure studies on emerging capital markets.

We analyse the performance persistence of Islamic and Socially Responsible Investment (SRI) mutual funds. We adopt a multi-stage strategy in which, in the first stage, partial frontiers’ approaches are considered to measure the performance of the different funds in the sample. In the second stage, the results yielded by the partial frontiers are plugged into different investment strategies based on a recursive estimation methodology whose persistence performance is evaluated in the third stage of the analysis. Results indicate that, for both types of funds, performance persistence actually exists, but only for the worst and, most notably, best funds. This result is robust not only across methods (and different choices of tuning parameters within each method) but also across both SRI and Islamic funds—although in the case of the latter persistence was stronger for the best funds. The persistence of SRI and Islamic funds represents an important result for investors and the market, since it provides information on both which funds to invest in and which funds to avoid. Last but not least, the use of the aforementioned techniques in the context of mutual funds could also be of interest for the non-conclusive literature.

This is the first study to provide comprehensive analyses of the relative performance of both socially responsible investment (SRI) and Islamic mutual funds. The analysis proceeds in two stages. In the first, the performance of the two categories of funds is measured using partial frontier methods. In the second stage, we use quantile regression techniques. By combining two variants of the Free Disposal Hull (FDH) methods (order- m and order- α) in the first stage of analysis and quantile regression in the second stage, we provide detailed analyses of the impact of different covariates across methods and across different quantiles. In spite of the differences in the screening criteria and portfolio management of both types of funds, variation in the performance is only found for some of the quantiles of the conditional distribution of mutual fund performance. We established that for the most inefficient funds the superior performance of SRI funds is significant. In contrast, for the best mutual funds this evidence vanished and even Islamic funds perform better than SRI. These results show the benefits of performing the analysis using quantile regression.

This study examines the impact of foreign controlling shareholder trust on firm market risk using two measures of total and idiosyncratic risk. An extensive global sample of 12,496 firm-year observations from 43 countries is employed. The results show that firms controlled by foreign trusting shareholders display lower levels of risk in both market measures. Trust appears more important for firms based in countries with a less favourable institutional environment, whereby it varies with the investment horizon of foreign controlling shareholders. The results are robust after controlling for cultural measures, endogeneity, selection bias and alternate model specifications.