The Underinvestment Problem, Risk Management, and Corporate Earnings Retention

Salvary, Stanley

doi:10.2139/ssrn.688222

Cited by 6 publications

(5 citation statements)

References 31 publications

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“…Ammon (1998) distinguishes hedging policies into two competing motives: strategies for maximizing equity value and strategies for managerial risk aversion. Others (Froot et al , 1993; Salvary, 2005) have grounded the relationship between forex exposure and hedging on the underinvestment theory. For instance, Froot et al (1993) explain that firms dealing with international transactions encounter two types of variabilities in their cash flows: variability in funds raised externally and variability in capital investment.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Greater uncertainties in the availability of funds in turn would reduce firms’ ability to secure investment opportunities. Salvary (2005) and Zahan and Kenett (2012) propose that firms engage in hedging strategies minimize the variability in their internal cash flows, and subsequently reduce their dependence on costly external fund. Similar to a certain extent is the growth opportunities theory.…”

Section: Literature Reviewmentioning

confidence: 99%

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Impact of shariah-compliant status on firms’ decision to practice forex hedging

Abdul-Rahim

Wahab

Yusoff

2019

JIABR

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Purpose The purpose of this paper is to investigate whether the shariah-compliant status of the firms negatively influences their use of foreign exchange hedging instruments. Design/methodology/approach This paper uses a logit panel regression on 350 firm-year observations from 70 nonfinancial listed firms over the period from 2010 to 2014. Shariah-compliant companies account for about 84 per cent of the sample firms. Findings Preliminarily, the results show that none of the samples of the shariah-compliant firms report any use of Islamic hedging instrument, either in the form of wa’d or tawarruq. The results of the study’s logit panel regression contradict the authors’ prediction that the shariah-compliant status negatively influences firms’ decision to hedge. In contrast, shariah-compliant companies are twice as likely as their conventional counterparts in adopting forex hedging. Research limitations/implications This study is limited to information disclosed in the items 31, 36 and 37 of financial management policies in the annual report. However, given that shariah-compliant firms must abide by the limit of 5 per cent profits before tax from clearly prohibited activities (including riba’), the need for exclusive disclosure on the adoption of Islamic or conventional hedging appears to be imperative for the viability of the Malaysian Islamic capital market. Practical implications In evaluating the shariah compliance of a company, investors (individual or institutional) must look further than just interest-based riba’ in mixed-business companies to ensure that they comply with the 5 per cent maximum requirement on the non-halal business contribution to profit. This is because the finding of this study indicates that shariah-compliant companies are twice as likely to adopt forex hedging, when none of them reports the use of Islamic hedging tools. Investors must therefore give ample allowance to riba’ that can be induced through the use of conventional forex hedging instruments. This is until the security market regulator imposes a requirement on shariah-compliant companies an explicit disclosure of the use of Islamic versus conventional hedging tools, as they had done in the case of Islamic versus conventional debt instruments. Social implications Muslim and socially responsible investors rely on the Shariah-compliant status of the company in ensuring that their wealth grows according to the Shariah principles. To sustain and develop the Islamic capital market which the firms have been relying on for external capital, Shariah-compliant firms and the authority awarding the status are equally responsible for honoring the trust that these investors by ensuring the permissibility (halal) of the business and the conduct of their business. Originality/value Conventional forex hedging instruments are criticized for violating as-sarf, a shariah principle, which requires the exchanges of particular assets (gold, silver and currency) to be delivered on the spot, and thereby infusing riba’ al-fadhl. Although Islamic (wa’d- or tawarruq-based) hedging instruments are widely available by Islamic banks in this country since they were introduced by Bank Negara Malaysia in 2010, paradoxically, the authors’ observation indicates that none of the studied firms reports the adoption of these instruments in their annual reports.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Abdul-Rahim

Wahab

Yusoff

2019

JIABR

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“…Furthermore, Salvary (2007) suggests that cash flow and dividends are the most influencing variables on REs. Companies with low investment opportunities for growth and expansion choose to distribute a large part of their earnings as dividends.…”

Section: Literature and Hypothesis Formulationmentioning

confidence: 99%

Retained Earnings and Dividends in Real Estate Sector in Egypt

Said Mohamed Gabr,

Hamed Abd Elkhaliq Mohamed

2024

IRER

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This study examines the trade-off between retained earnings (REs) and dividends in the Egyptian context to determine whether REs affect dividend policy and payout. Additionally, the study examines how the life cycle of a company influences the aforementioned relationships. The results of a multiple regression analysis indicate that REs are positively and significantly related to dividend policy and payout. However, when the company life cycle is introduced as a moderator, the results suggest a significantly negative relationship. Furthermore, a confirmatory test reveals that lagged REs influence dividend policy and payout. These findings carry significant implications for various stakeholders in Egypt. To the best of the knowledge of the authors, no study has investigated the causal relationship between REs and dividends in the Egyptian real estate context.

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“…The study concluded that there existed a significant difference between domestic and multinational companies with regard to the manner in which retained earnings were managed and also the factors that determined retained earnings. Salvary (2007) studied the problem of under investment, risk management and corporate earnings retention for a period from 1983 to 1990 consisting of 45 firms for purpose of study. Study concluded that risk management was viewed as the management of firm's operations activities and financing practices to produce a portfolio of risks which resulted in average pay off.…”

Section: Rbi (Reserve Bank Of India 2005mentioning

confidence: 99%

Determinants of Retained Earnings in Profitable Steel Companies in India: A Study of Steel Sector

Masood

2018

Int. J. Res. Granthaalayah

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In this paper an attempt has been made to identify the important determinants of retained earnings in profitable steel companies in steel sector of India and which have impact on the retention of earnings of steel companies under study. Multiple linear regression is used to identify the determinants of retained earnings for a period of sixteen years. Also the importance of retained earnings as a source of finance for steel sector companies is also studied in the paper.

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The Underinvestment Problem, Risk Management, and Corporate Earnings Retention

Cited by 6 publications

References 31 publications

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Impact of shariah-compliant status on firms’ decision to practice forex hedging

Retained Earnings and Dividends in Real Estate Sector in Egypt

Determinants of Retained Earnings in Profitable Steel Companies in India: A Study of Steel Sector

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