The quality of earnings in Shariah-compliant companies: evidence from Malaysia

• Published in: Journal of Islamic accounting and business research 2015-04, Vol.6 (1), p.19-41
• Main Authors: Wan Ismail, Wan Adibah, Kamarudin, Khairul Anuar, Sarman, Siti Rahayu
• Format: Article
• Language: English
• Subjects: Accounting; Accounting & Finance; Accounting/accountancy; Business ethics; Capital markets; Earnings management; Financial reporting; Financial statements; Foreign investment; Hypotheses; Incentives; Institutional investments; Investors; Islamic accounting; Islamic financing; Islamic law; Morality; Muslims; Obstruction of justice; Quality; Religion; Studies; Values
• ISSN: 1759-0817; 1759-0825
• DOI: 10.1108/JIABR-03-2013-0005

Purpose – The purpose of this study is to examine the quality of reported earnings in the corporate reports of Shariah-compliant companies listed on Bursa Malaysia. Design/methodology/approach – This study hypothesises that companies with Shariah compliance status have higher quality of earnings because of greater demand for and supply of high-quality financial reports. The quality of reported earnings is measured using the cross-sectional Dechow and Dichev (2002) accrual quality model. The study uses a balanced panel data of 3,048 observations from 508 companies during a six-year period of 2003-2008. Findings – This paper finds robust evidence that Shariah-compliant companies have significantly higher earnings quality compared to other firms. The results provide support for the arguments that Shariah-compliant companies supply a higher quality of reported earnings to attract foreign investment, have greater demand for high-quality financial reporting because of their Shariah status and are subject to greater scrutiny by regulators and institutional investors. Research limitations/implications – This study contributes to the existing literature on Islamic capital market, business ethics, firms’ governance and financial reporting quality. The study would give a better understanding on issues relating to earnings quality of Shariah-compliant companies and would be especially useful for financial statement users, including investment analysts. Originality/value – This paper provides evidence on the quality of earnings in Shariah-compliant companies and offers new arguments that explain why such companies possess higher quality of earnings compared to their counterparts.