Religion and ratio analysis: Towards an Islamic corporate liquidity measure |
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| Institution: | 1. College of Business and Technology, Eastern Kentucky University, 521 Lancaster Avenue #137, Richmond, KY 40475, United States;2. Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148, United States;3. Fogelman College of Business and Economics, The University of Memphis, 3675 Central Avenue #437, Memphis, TN 38152, United States;1. American University of Sharjah, United Arab Emirates;2. HEC Montreal, Canada;3. UAE University, United Arab Emirates;1. University of Strasbourg, IEP Strasbourg, and EM Strasbourg Business School, France;2. University of Sousse, IHEC Sousse, Tunisia |
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| Abstract: | 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). |
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