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

The quality of earnings in Shariah-compliant companies: evidence from Malaysia 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Islamic Accounting and Business Research Emerald Publishing

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

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References (68)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1759-0817
DOI
10.1108/JIABR-03-2013-0005
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Islamic Accounting and Business Research – Emerald Publishing

Published: Apr 13, 2015

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