The quality of earnings in Shariah-compliant companies: evidence from Malaysia
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 13 April 2015
Abstract
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.
Keywords
Acknowledgements
The authors gratefully acknowledge financial support from Accounting Research Institute and Faculty of Accountancy, Universiti Teknologi Mara.
Citation
Wan Ismail, W.A., Kamarudin, K.A. and Sarman, S.R. (2015), "The quality of earnings in Shariah-compliant companies: evidence from Malaysia", Journal of Islamic Accounting and Business Research, Vol. 6 No. 1, pp. 19-41. https://doi.org/10.1108/JIABR-03-2013-0005
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited