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This paper aims to examine the impact of bank’s capital buffer on return on equity (ROE) in the context of Islamic and conventional banks in GCC countries.

The authors collect data from 83 commercial banks comprising of 49 conventional banks and 34 Islamic banks for the period 2010–2019. The final data set comprises of 744 bank-year observations. The authors apply generalized methods of moments estimation technique and panel least square to analyze the data.

The authors document that Tier-1 capital, total regulatory capital (TRC) and equity to asset ratio (EAR) negatively affect banks’ ROE. However, the impact disappears for conventional banks and sustains for Islamic banks if these two clusters of banks are treated separately. Furthermore, the negative impact of equity capital on earning is more pronounced for large and listed commercial banks.

Findings of this research imply that Islamic banks in GCC countries has scope to manage equity capital more efficiently. Hence, they should concentrate on using banks equity wisely to successfully compete with the conventional banks.

Since the global financial crisis of 2009, Islamic banks of GCC countries have been reporting lower ROE compared to their conventional counterparts. On the other hand, Islamic banks maintain higher level of Tier-1 capital, TRC and EAR. This evidence hypothetically suggests that Islamic banks are overly cautious in managing their capital buffer that results in lower ROE. To the best of the author’s/authors’ knowledge, no other study in the literature tests this hypothesis in the GCC context.

The paper aims to compare the return on Mudhārabah deposits (ROMD) to the return on equity (ROE) in Islamic banks.

The summary statistics of the ROMD and the ROE is used to make a comparison between them with a sample of nine Islamic banks, from seven countries, over the last five years. Regression analysis is also undertaken to unveil the variables affecting the behaviour of ROMD and ROE at Kuwait Finance House.

The results show that the ROE tend to be at least two times higher than the ROMD. In most of the investigated cases the ROMD are more correlated to the corresponding conventional interest rate than to ROE. The regression analysis suggests that the return on assets affects more significantly the ROE than the ROMD.

The originality of the paper resides in the size of the sample and in the design and the findings.

The value‐premium is the empirical observation that “value” stocks (low market/book) have higher returns than “growth” stocks (high market/book). The purpose of this paper is to propose a new explanation for the value‐premium that the authors call the limits to growth hypothesis.

To guide the testing, a dynamic equity valuation model was used that has the property that profitability increases risk for value firms in anticipation of future growth‐leverage, whereas, profitability “covers” the capital expenditure costs of growth, which decreases risk for growth firms. Because the authors interpret dividends as a corporate response to growth‐limits, they test for this predicted differential relation between profitability and risk for value versus growth stocks with the returns of profitable dividend‐paying firms.

It is found that profitability increases returns to a greater extent for dividend‐paying value firms compared to dividend‐paying growth firms, which is consistent with a differential relation between profitability and risk. At the same time, it is also found that growth firms have lower returns than value firms.

The authors use the limits‐to‐growth hypothesis to explain why profitability can either increase or decrease risk. High‐profitability dividend‐paying growth firms have lower returns than low‐profitability dividend‐paying value firms. This value‐premium is consistent with the argument that high profitability “covers” the capital expenditure costs of growth, which decreases risk and, thus, returns. At the same time, profitability increases returns to a greater extent for value stocks compared to growth stocks, which is consistent with the hypothesis that profitability increases risk for value firms in anticipation of future growth‐leverage.

This paper demonstrates that present value (PV) models can be viewed as multiperiod extensions of accrual income statements (AISs). Failure to include AIS details in PV models may lead to inaccurate estimates of earnings and rates of return on assets and equity and inconsistent rankings of mutually exclusive investments. Finally, this paper points out that rankings based on assets and equity earnings and rates of return need not be consistent, requiring financial managers to consider carefully the questions they expect PV models to answer.

AISs are used to guide the construction of PV models. Numerical examples illustrate the results. Deductions from AIS definitions demonstrate the potential conflict between asset and equity earnings and rates of return.

PV models can be viewed as multiperiod extensions of AISs. Mutually exclusive rankings based on assets and equity earnings and rates of return need not be consistent.

PV models are sometimes constructed without the details included in AISs. The result of this simplified approach to PV model construction is that earnings and rates of return may be miscalculated and rankings based as asset and equity earnings and rates of return are inconsistent. Tax adjustments for asset and equity earnings may be miscalculated in applied models.

This paper provides guidelines for properly constructing PV models consistent with AISs.

PV models are especially important for small to medium size firms that characterize much of agricultural. Providing a model consistent with AIS construction principles should help financial managers view the linkage between building financial statements and investment analysis.

This is the first paper to develop the idea that the PV model can be viewed as a multiperiod extension of an AIS.

I show that the common residual income model assumption that return on equity approaches zero in the long run as competitive advantage dissipates is incorrect. This erroneous assumption comes from the common misinterpretation of the spread between return on equity and the cost of equity as a measure of economic profit. I also show that an unbiased accounting system (Feltham and Ohlson, 1995), which would make such an interpretation acceptable, is unlikely to exist in actual financial statements. Finally, I argue that because an accounting system can be deemed to be unbiased only if the firm's value is already known, the concept is of little practical use for actual valuation work.

DuPont financial analysis is generally used in micro-economic studies to compare an individual firm’s financial performance with industry averages. The purpose of this paper is to undertake a macro-economic cross-sectional analysis of the determinants of return-on-equity (ROE) in USA, German and Japanese manufacturing firms.

The authors use cross-sectional log-linear multivariate regression analysis to determine the elasticity of ROE to changes in net profit margin (NPM), total assets turnover (TAT) and equity multiplier (EQM) in USA, German and Japanese manufacturing firms. The authors obtain the data for the analysis from the COMPUSTAT Research Insight/Global Vintage database.

With data for all manufacturing firms, the authors find that the most important determinant of ROE is NPM in all three countries. The least important determinant of ROE is TAT in the USA and Germany, and EQM in Japan. Electronics is the most important manufacturing industry in all three countries, the authors also apply the analysis to data for the electronics manufacturing firms in the three countries. The authors find that an increase of 10 percent in NPM increases ROE by about 9.8 percent in Germany, by about 8.3 percent in the USA, and by about 6.9 percent in Japan. An increase of 10 percent in TAT increases ROE by about 2.2 percent in Germany and by about 1.5 percent in Japan. An increase of 10 percent in EQM increases ROE by about 1.9 percent in Germany and by about 1.5 percent in the USA.

The empirical findings of this study can provide useful insights for financial managers regarding the determinants of ROE they should focus on to achieve the greatest impact on ROE.

DuPont analysis is generally used as a micro-economic tool at the firm level. This study is a macro-economic application of the tool to study the cross-sectional determinants of ROE at the industry level.

This paper aims to examine the relationship between business process management (BPM) and company performance. The research focuses on the instrumental aspect of core business processes and its controlling activities in small and medium-sized companies (SMEs) to identify the relationship to company performance.

The results presented in this paper are based on a survey of Slovene SMEs. A questionnaire was distributed to 3007 SMEs via e-mail and a response rate of 5.42% was achieved. The financial data of companies over a six year period as derived from the publicly available financial reports of SMEs along with an industry-specific financial risk measure and other financial data were used for the company risk-adjusted performance measures of relative residual income (ROE-r) and risk-adjusted ROE (ROE-a) calculation.

The results show that instrumental aspects of core business process controlling activities are related to risk-adjusted company performance measures ROE-r and ROE-a. Companies with lower ROE-r and ROE-a have been perceived to be more focused on the instrumental aspect of BPM. Presumably due to the small sample, the results of a non-parametric Mann–Whitney U test did not statistically confirm the developed hypothesis: “the instrumental aspect of controlling as a core process management activity has a statistically significant impact on company risk-adjusted performance measures such as ROE-r and ROE-a.” Despite this, the results show a possible negative correlation between risk-adjusted performance measures and BPM, which opens possibilities for further research.

The main limitation of the purposed study model is that the paper have studied only control activities of core business processes and relate it to company risk-adjusted performance measures. The study has been limited by the SME sample and the use of a survey as a research instrument. An additional limitation of the research is the degree of reliability implied by the assumptions of the models used to estimate the required return on equity and risk. Results concern investors, managers and practitioners to start BPM improvement initiatives, to set BPM priority measures and to set priority management decisions and further actions.

This paper presents the unique findings from an investigation of the instrumental aspects of BPM practices and their relationship to company risk-adjusted performance measures in SMEs. This paper developed a measurement instrument for measuring the instrumental aspects of BPM use. An additional original contribution is the use of company risk-adjusted performance measures such as ROE-r and ROE-a, which take into account the required profitability of companies in different industries according to the risk and allows comparable results of companies from different industries. The approach is innovative and interesting as regards researching the factors that affect the profitability of companies that operate in different industries.

This paper aims to examine the effect of capital structure on Islamic banks’ (IBs) performance to provide guidance to finance managers for raising capital funds. As newcomers to the markets, IBs are facing a trade-off. They can either use high capital ratios which increase the soundness and safety of the bank and lower the required return by investors, or depend on deposits and Islamic bonds which are considered cheaper sources of funds due to their tax rebate. An IB’s management must carefully decide the appropriate mix of debt and equity, i.e. capital structure, to maximize the value of the bank.

Using a sample of 85 IBs covering banking systems in 19 countries, the study uses a two-stage least squares method to examine the performance determinants of IBs to control the reverse causality from performance to capital structure.

After control of the macroeconomic environment, financial market structure and taxation, results indicate that IBs’ performance (profitability) responds positively to an increase in equity (capital ratio). The result is consistent with the signaling theory which predicts that banks expected to have better performance credibly transmit this information through higher capital. Optimal capital structure results of the IBs found a non-monotonic U-shaped relationship between the capital-asset ratio and profitability, supporting the efficiency risk and franchise value hypotheses.

Due to limitations for market data, the study uses book accounting ratios. Future research where market data are available could use performance measures, such as Tobin’s Q in performance determinants models.

The non-monotonic relationship found between IBs’ return on equity and capital ratios suggests that equity issuances for IBs’ with low capital ratios (lower than the turning point of 37.41 per cent) are expensive and have a negative effect on their profitability. On the other hand, managers of well-capitalized IBs (banks with capital ratios beyond 37.41 per cent) are advised to rely on equity when faced by a decision to raise capital, as the capital ratio starts to affect their profitability positively.

Islamic banking literature has been silent on IBs’ capital structure and its relevance; this study will try to fill in the existent gap.

The study seeks to find the effect of financial leverage on the firm performance of non-financial companies listed in the Tokyo stock market.

The study collected data from 263 companies in the automobile and industrial producer sectors listed on the Tokyo stock exchange between 2001 and 2021. The generalized method of moments was used to estimate the effect of leverage on financial performance due to its ability to overcome the problems of endogeneity and autocorrelation.

The study found that the equity multiplier has a positive and statistically significant effect on return on assets (ROA), return on equity (ROE) and earning per share (EPS). The study discovered that the interest coverage ratio has a positive and statistically significant effect on ROA, ROE, EPS and Tobin’s Q. The results revealed that the degree of financial leverage and debt to earnings before interest, taxes, depreciation and amortization (EBITDA) have a negative and statistically significant effect on ROE, EPS and Tobin’s Q. The study also found that the capitalization ratios of the firms have a negative and statistically significant effect on ROA, ROE, EPS and Tobin’s Q.

The use of debt financing, which presents financial leverage, indicates that the companies can make enough earnings to pay off the interest and principal (debt service obligations), which were shown by the interest coverage ratio, as well as to pay all the long-term fixed expenses, which were shown by the fixed charge coverage ratio. Interest and fixed charge coverage have a positive statistically significant effect on the financial performance of automobile and industrial producer companies.

The study focused on the effect of financial leverage on financial performance by relying on pecking and trade-off theories to contribute to the existing body of literature in finance.

This paper aims to highlight firms' profitability as an alternative channel by which changes in leverage could affect stock returns in an imperfect market setting. The author also analytically argues that the benefits of debt, if any, may accrue beyond the usual tax benefit channel.

The author used multivariate regression models based on firms' characteristics and the models' changes along with a two-stage least-square (2SLS) type procedure to estimate the impact of leverage changes on stock returns. The author controls for the varying arbitrage risk that is measured by forecasted idiosyncratic volatility of stock prices and overcome simultaneous or endogenous determination by using inter-temporal non-synchronous variation in leverage and control variables.

The author finds that increase in leverage increase (decrease) stock returns for firms with the gross operating profitability higher (lower) than the cost of debt. The author also finds that the variation in arbitrage risk does not substitute for the primary effect of leverage changes on stock returns.

The author's findings provide tacit support to the recent literature attempting to resolve the empirically puzzling pattern of the negative relationship between profitability and leverage. The findings suggest inclusion of profitability as a crucial asset-pricing factor in the contemporary empirical models.

The non-trivial role of profitability in determining the effect of leverage on firms' stock returns that may be useful to managers, credit analysts and policy makers to assess the impact of net profitability on any change in leverage and its ensuing consequences on firms' value.

The paper develops analytical insights into the marginal role of profitability in influencing the relationship between firms' financing decisions and firms' stock returns beyond the conventional mechanisms of tax benefits, bankruptcy costs and information asymmetry.