Journal of Law and Financial Management - Volume 10 (1) June 2011
Islamic Finance As A Structured Products Business Line - Acute Complexity and the Need for Standardisation
by Michael Bennett
Islamic finance and structured products are two of the most successful financial market innovations of the last 30 years. They have also become intertwined in the dealing rooms of the large western banks that treat Islamic finance as a kind of fixed income structured product. As a result, the Islamic fixed income products created by these banks share many of the same problems as conventional structured products, including complexity and a lack of transparency. In the article, Bennet examines the impact of these problems on the development of the Islamic fixed income market, and argue for greater standardisation of products as a cure for these problems.
An Analysis of the Concept of Mortgage-backed Securities - An Economic and Legal Perspective
by Pelma Rajapakse
This article examines the concept of mortgage-backed securities (MBS) issued in the securitisation programs in a theoretical context. First, it outlines a general explanation of the securitisation process, focusing particularly on MBS programs, within a context of microeconomic theory. Second, the incentives for participants in the MBS programs are outlined within a contractarian framework, which includes the agency theory and provides a framework to analyse the incentives of the various participants at each stage of, or contract in, the overall securitisation process. Finally, suggestions are made concerning some of the key features that might characterise a theoretically optimal regulatory regime for mortgage-backed securities.
Inter-Industry Variation in the Relation between Abnormal Accruals & Audit Engagement Life Expectancy
by John Shon
Lustgarten and Shon (2011) exploit a hazard model to examine the determinants of the expected remaining length (i.e. life expectancy) of audit engagements. Their main finding is that the life expectancies of audit engagements decrease when firms make relatively large positive or large negative abnormal accruals, but such life expectancies increase with relatively modest abnormal accruals. In this study, I examine the inter-industry variation in this relation across 48 different industry classifications (Fama and French, 1997). Audit engagement life expectancies for six industries (Apparel, Automobiles and Trucks, Electrical Equipment, Miscellaneous, Pharmaceutical Products, Retail) are found to be particularly sensitive to large negative abnormal accruals Similarly, five industries (Banking, Fabricated Products, Real Estate, Rubber and Plastic Products, Wholesale) are sensitive to large positive abnormal accruals. Lastly, three industries (Communication, Precious Metals, Transportation) are sensitive to both negative and positive accruals. These findings help inform auditors, client firms and industry regulators that are more susceptible to contentious disagreements that may arise during audit engagements.