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Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital

This paper emphasizes on the conflicts of interest between agents in order to assess whether venture capital can be a potential model of musharakah in imperfect markets. To achieve this purpose, this study opts for the financial contracting enforceability approach and Monte-Carlo simulation to ident...

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Main Authors: Ajmi, Hechem, Abd. Aziz, Hassanuddeen, Kassim, Salina
Format: Article
Language:English
English
Published: Universiti Putra Malaysia 2020
Subjects:
BP322.3 Musharakah - Partnership
BPH437 Sukuk - Islamic Bond
HG3368 Islamic Banking and Finance
Online Access:http://irep.iium.edu.my/83077/1/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts.pdf
http://irep.iium.edu.my/83077/2/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts_scopus.pdf
http://irep.iium.edu.my/83077/
http://www.ijem.upm.edu.my/vol14no1/8)%20Does%20Venture%20Capital.pdf
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spelling my.iium.irep.830772021-04-30T03:51:47Z http://irep.iium.edu.my/83077/ Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital Ajmi, Hechem Abd. Aziz, Hassanuddeen Kassim, Salina BP322.3 Musharakah - Partnership BPH437 Sukuk - Islamic Bond HG3368 Islamic Banking and Finance This paper emphasizes on the conflicts of interest between agents in order to assess whether venture capital can be a potential model of musharakah in imperfect markets. To achieve this purpose, this study opts for the financial contracting enforceability approach and Monte-Carlo simulation to identify the contract that maximizes the value of the firm subject to the enforcement constraint for the agent and the participation constraint for the principal, taking into account market frictions, and the two levels of the industrial shocks. Findings reveal that musharakah is the optimal contract for agents, subject to their constraints when the shock is low and high. In addition, the simulation results indicate that the increase in market frictions engenders higher profit-sharing ratio for the financier when venture capital and musharakah financings are used. The increase in the value of the firm in case of high shock is attributed to the increase in the profit-sharing ratios for both contracts to mitigate the selfish behavior of the agent. Therefore, the financier tends to require a higher profit-sharing ratio as a compensation for the severer information asymmetry. Universiti Putra Malaysia 2020 Article PeerReviewed application/pdf en http://irep.iium.edu.my/83077/1/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts.pdf application/pdf en http://irep.iium.edu.my/83077/2/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts_scopus.pdf Ajmi, Hechem and Abd. Aziz, Hassanuddeen and Kassim, Salina (2020) Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital. International Journal of Economics and Management, 14 (1). pp. 111-127. ISSN 1823-836X E-ISSN 2600-9390 http://www.ijem.upm.edu.my/vol14no1/8)%20Does%20Venture%20Capital.pdf
institution Universiti Islam Antarabangsa Malaysia
building IIUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider International Islamic University Malaysia
content_source IIUM Repository (IREP)
url_provider http://irep.iium.edu.my/
language English
English
topic BP322.3 Musharakah - Partnership
BPH437 Sukuk - Islamic Bond
HG3368 Islamic Banking and Finance
spellingShingle BP322.3 Musharakah - Partnership
BPH437 Sukuk - Islamic Bond
HG3368 Islamic Banking and Finance
Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
description This paper emphasizes on the conflicts of interest between agents in order to assess whether venture capital can be a potential model of musharakah in imperfect markets. To achieve this purpose, this study opts for the financial contracting enforceability approach and Monte-Carlo simulation to identify the contract that maximizes the value of the firm subject to the enforcement constraint for the agent and the participation constraint for the principal, taking into account market frictions, and the two levels of the industrial shocks. Findings reveal that musharakah is the optimal contract for agents, subject to their constraints when the shock is low and high. In addition, the simulation results indicate that the increase in market frictions engenders higher profit-sharing ratio for the financier when venture capital and musharakah financings are used. The increase in the value of the firm in case of high shock is attributed to the increase in the profit-sharing ratios for both contracts to mitigate the selfish behavior of the agent. Therefore, the financier tends to require a higher profit-sharing ratio as a compensation for the severer information asymmetry.
format Article
author Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
author_facet Ajmi, Hechem
Abd. Aziz, Hassanuddeen
Kassim, Salina
author_sort Ajmi, Hechem
title Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
title_short Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
title_full Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
title_fullStr Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
title_full_unstemmed Does venture capital substitute Islamic profit and loss sharing contracts? theoretical analysis on Musharakah and venture capital
title_sort does venture capital substitute islamic profit and loss sharing contracts? theoretical analysis on musharakah and venture capital
publisher Universiti Putra Malaysia
publishDate 2020
url http://irep.iium.edu.my/83077/1/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts.pdf
http://irep.iium.edu.my/83077/2/83077_Does%20venture%20capital%20substitute%20Islamic%20profit%20and%20loss%20sharing%20contracts_scopus.pdf
http://irep.iium.edu.my/83077/
http://www.ijem.upm.edu.my/vol14no1/8)%20Does%20Venture%20Capital.pdf
_version_ 1698696738918891520
score 13.211869

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