The impact of profit-sharing investment accounts on shareholders’ wealth

Abstract

This study evaluates the impact of profit-sharing investment accounts (PSIAs) on shareholders’ wealth. Using probabilistic tools, we derive an explicit formula for PSIA value. We apply this formula to calculate account values for a sample of 52 banks in 13 countries and determine an empirical rank order of value-drivers. We also assess the impact of returns’ smoothing schemes on shareholders’ wealth, namely the use of reserves and/or subsidies to adjust cash returns to investment account holders. We find that the value of PSIAs varies widely amongst banks, and that originating high-quality assets dominates returns’ smoothing in the value creation process. We also find that if subsidies are used without reserves to smooth returns, then shareholders’ wealth is destroyed in the long term for 77% of banks in our sample. This finding supports the practice of prioritising reserves over subsidies to smooth returns.