Religion and Ratio Analysis: Towards an Islamic Corporate Liquidity Measure
Accounting, Finance, and Information Systems
This paper contributes to the emerging literature on the effect of religion on corporate decision making and financial reporting. Financial statement analytical tools could violate several commands of Islamic law. Specifically, traditional liquidity ratios imply undervaluation, uncertainty, and interest bearing aspects that are strictly prohibited in Islamic law. We propose an Islamic-compliant measure of corporate liquidity. In order to validate our proposed ratio as a measure of corporate liquidity, we incorporate it in the traditional corporate bankruptcy prediction models. Our measure significantly improves the accuracy of the corporate bankruptcy prediction models of Altman (1968) Z-score and Ohlson (1980).
Elnahas, A. M., Hassan, M. K., & Ismail, G. M. (2017). Religion and ratio analysis: Towards an Islamic corporate liquidity measure. Emerging Markets Review, 30, 42-65. doi:10.1016/j.ememar.2016.09.001
Emerging Markets Review