The validity of the irrelevant theory in Middle East and North African markets: conventional banks versus Islamic banks

Abstract

Purpose

The purpose of this paper is to test the validity of irrelevant theory empirically by exploring the relationship between cash dividends, profitability, leverage and investment policy with the value of banking institutions in the Middle East and North Africa (MENA) markets.

Design/methodology/approach

The paper adopts Ohlson’s (1995) valuation model. The author estimates models by using static panel (random and fixed effects) techniques and the dynamic technique, namely, the GMM estimation. The empirical study covers a sample of 122 conventional and 37 Islamic banks listed on stock markets in 12 MENA countries over the period 1999–2018.

Findings

The empirical results show that dividend yield has no significant association with the value of conventional banks, whereas profitability, growth opportunity and leverage have a significant positive impact on the value of conventional banks. In contrast, the results for a sample of Islamic banks indicate that the dividend yield, profitability and leverage have a significant positive effect on the value of Islamic banks, whereas growth opportunity has no significant effect on the value of Islamic banks. Therefore, these results support, to a greater extent, the validity of the dividend irrelevance theory of Modigliani and Miller for conventional banks but would not be accepted for Islamic banks in the MENA region.

Research limitations/implications

This study is restricted to a sample of one type of financial firms, banking firms listed in the MENA countries. In addition, the study has dealt with one type of dividend (the cash dividend).

Practical implications

Highlighting the difference between conventional and Islamic banks is crucial to understanding dividend policy behavior and to providing investors information to be integrated in their valuation setting to make informed corporate decisions.

Originality/value

To the best of the author’s knowledge, the present study is the first of its kind that it draws a comparative analysis by testing empirically the validity of the Irrelevant Theory to banks in the MENA region covering a long time period in the recent past.

Citation

Budagaga, A.R. (2022), "The validity of the irrelevant theory in Middle East and North African markets: conventional banks versus Islamic banks", Journal of Financial Economic Policy, Vol. 14 No. 4, pp. 491-514. https://doi.org/10.1108/JFEP-06-2021-0148