Islamic Accounting and the Impact of Accounting Ratios on the Islamic Banks' Share Prices

The aim of this article is to investigate the role of the accounting regulation for the Islamic financial system, how Islamic banks have to account their investments, according to the Shari’ah law, and how they consider their financial assets. In addition, financial statement, and its relative accounting ratios, has become an integral part in the investment choices, thus, determining potential oscillations of the stock price of banks and companies. Moreover, the article will consider the share price of Islamic banks listed in the Bahrain Bourse, during the years 2009 – 2014, and accounting ratios such as Return on Assets (ROA), Return on Equity (ROE), size of the firm and debt ratio, in order to understand their impact on the share price.A theoretical analysis develops the knowledge about the Islamic sector by analysing the main financial instruments and how Islamic banks must account for, and why the accounting regulation is an important part of this field. In addition, the main Islamic standards will be examined in order to understand and describe in a proper way the environment in which the research is rooted.Finally, a quantitative analysis will be performed by using the panel data analysis in order to investigate the effect of the selected accounting ratios on the share price. In this particular case the Random Effect Model is deemed to be the best model for this research. The final results show that ROA, debt ratio and share price are characterised by a positive relationship, whereas firm size and share price are linked by a negative relationship.