MARKETABLE PROFIT-AND-LOSS SHARING CONTRACTS: BROADENING THE GLOBAL NON-EQUITY CAPITAL MARKETS

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Abstract

In this paper we have provided the theoretical foundation for a “profit-and-loss sharing contract” as a practicable alternative to corporate bonds. We mathematically demonstrate that the standard pricing model for a straight coupon bond is obtainable as a special case of a profit-and-loss sharing contract valuation model. We also show that the returns to the holder of a profit-and-loss contract, even in the presence of market friction, can be potentially greater than those from a straight corporate bond if there is a substantial default risk premium. Our analysis provides a means of broadening the global market for non-equity capital by offering an alternative to interest-bearing debt which is not socio-religiously acceptable in some cultures and can be of special relevance, for example, to many emerging markets in Asia and Middle East.

Keywords: Bond Pricing Model, Debt Alternatives, Profit-and-loss Sharing, Emerging Markets

How to cite this paper: Wolf, F., Nabin, M. H., & Bhattacharya, S. (2012). Marketable profit-and-loss sharing contracts: Broadening the global non-equity capital markets. Corporate Ownership & Control, 10(1-6), 586-596. https://doi.org/10.22495/cocv10i1c6art3