Islamic and Traditional Corporate Finance: a Comparative Study on WACC

Nicola Miglietta; Enrico Battisti

doi:10.13135/2421-2172/1609

Nicola Miglietta School of Management and Economics, University of Turin
Enrico Battisti School of Management and Economics, University of Turin

DOI: https://doi.org/10.13135/2421-2172/1609

Keywords: Weighted Average Cost of Capital (WACC), Islamic Corporate finance, Traditional Corporate Finance, Risk, Listed Companies.

Abstract

The paper represents a first exploratory study based on the comparison between the Weighted Average Cost of Capital (WACC) of a sample of companies listed on Malaysian Stock Exchange, classified and shared according to the principles of Islamic finance (i.e. riba, risk sharing, haram).

In particular, the main aim of the analysis is to provide some evidences of the potential effect on the risk (measured by beta) on the WACC as result of the principles used to divide the companies between Shari’ah Compliant and not Shari’ah Compliant. Generally our findings are focused on a greater level of WACC related to the LCSC that belong to the majority of selected sectors and, according to the principles of Islamic finance, they have shown a leverage ratio lower than that of companies not Shari’ah Compliant.

Author Biographies

Nicola Miglietta, School of Management and Economics, University of Turin

Department of Management

Enrico Battisti, School of Management and Economics, University of Turin

Department of Management

References

Aggarwal, R.K. & Yousef, T. (2000). Islamic Banks and Investment Financing. Journal of Money, Credit and Banking, 32(1), 93-120.

Biancone, P.P. (2012). Il bilancio della banca islamica e la rappresentazione dei principali contratti finanziari. FrancoAngeli, Milano.

Brealey, R.A., Myers, S.C. & Allen, F. (2014). Principles of Corporate Finance. 11/e. Mc Graw-Hill, New York.

Copeland, T.E., Weston, F.J. & Shastri, K. (2004). Financial Theory and Corporate Policy. 4/e. Pearson, New York.

Dallocchio, M. & Salvi, A. (2011). Finanza aziendale 1 – Finanza Ordinaria. EGEA, Milano.

Damodaran, A. (2011). Applied Corporate Finance: A User’s Manual. John Wiley & sons, New York.

Damodaran, A. (2015). Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2015 Edition. Available at: http://pages.stern.nyu.edu/~adamodar/, 1-120.

Dar, H. & Presley, J. (1999). Islamic Finance: A Western Perspective. International Journal of Islamic Financial Services, 1(1), 1-9.

Fama, E.F., French, K.R. (1999). The Corporate Cost of Capital and the Return on Corporate Investment. Journal of Finance, 54(6), 1939-1967.

Gomel, G. (2010). Islamic Finance and Conventional Financial Systems-Market Trends, Supervisory Perspectives and Implications for Central Banking Activity. Questioni di Economia e Finanza, 73, 1-77.

Habib, A. (2007). Issues in Islamic Corporate Finance: Capital Structure in Firms. IRTI Research Paper Series, 70, 1-39.

Harris, M. & Raviv, A. (1991). The Theory of Capital Structure. The Journal of Finance, 46(1), 297-355.

Humayon, A.D. & Presley, J.L. (2000). Lack of Profit Loss Sharing in Islamic Banking: Management and Control Imbalances. International Journal of Islamic Financial Services, 2(2), 1-16.

Iqbal, M. & Molyneux, P. (2005). Thirty Years of Islamic Banking: History, Performance, and Prospects. Palgrave Macmillan, Houndmills, New York.

Iqbal, Z. & Mirakhor, A. (2007). An introduction to Islamic Finance: Theory and Practice. John Wiley & Sons, Singapore.

KFH Research (2014). Global Islamic Finance: Propositions to Europe. KFH Research Ltd.

Metwally, M. (2006). Economic Consequences of Applying Islamic Principles in Muslim Societies. Journal of Islamic Banking and Finance, 23(1), 11-33.

Miglietta, N. (2004). La struttura finanziaria obiettivo del sistema impresa. Giappichelli, Torino.

Modigliani, F. & Miller, M.H. (1958), The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261-297.

Mohamad, N.E.A.B. & Saad, N.B.M. (2012). Cost of Capital – The Effect to Firm Value and Profitability Performance in Malaysia. International Journal of Academic Research in Accounting, Finance and Management Sciences, 2(4), 353-361.

Nagano, M. (2010). Islamic Finance and the Theory of Capital Structure. MPRA Paper, 24567, 1-18.

Salvi, A. & Miglietta, N. (2013). Principi di Finanza Islamica. Cacucci Editore, Bari.

Securities Commission of Malaysia (2014). List of Shariah-Compliant Securities by the Shariah Advisory Council of the Securities Commission Malaysia. SCM Paper, 28 November, 1-34.

Shafizal, B.S. & Mansur, M. (2013). Determinants of cost of equity: The case of Shariah-compliant Malaysian firms. MPRA Paper, 62364, 1-53.

Tardivo, G., Schiesari, R. & Miglietta, N. (2012). Corporate Finance. Isedi, Torino.

Van Horne, J. & Wachovicz, J.M. (2008). Fundamentals of Financial Management. 13/e. Prentice Hall, New York.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. & Salvi, A. (2014). Corporate Finance: Theory and Practice. 4/e. Wiley Finace, New York.

Warde, I. (2000). Islamic Finance in the Global Economy. Edinburgh University Press, Edinburgh.