Measuring Free Cash Flows to Equity for Financial Institutions: An Application to Qatar Islamic and Conventional Banks

Abstract

This paper explores how accounting disclosures can be combined with regulatory disclosures to refine existing concepts of free cash flows to equity (FCFE) for financial institutions. The resulting measure is designed to promote market discipline by helping investors distinguish among capital demands driven by new growth opportunities, organic capital generation and shifting risk weightings. We apply this measure to the publicly listed conventional and Islamic banks in Qatar. The results support the conclusions that FCFE is relevant for predicting growth and the demand for capital for both Islamic and conventional banks.