Abstract
This study examines the dividend policy behavior of Islamic and conventional banks operating in Arab markets. These banks operate in an environment of Sharia law and low levels of investor protection. Our results support the substitution agency model of dividends for Islamic banks, and Islamic banks use the dividend policy as a substitute mechanism for alleviating relatively more significant agency problems and higher risks of expropriation by insiders. In these markets, conventional banks operate in a more competitive environment and experience relatively less significant agency problems. In contrast to Islamic banks, conventional banks follow the outcome agency model of dividends.
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