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English Title

Corporate Governance and Earnings Management

Keywords

Earnings management, Earnings quality, Islamic banks, Conventional banks, Corporate governance mechanisms, Annual reports, MENA region.

Disciplines

Accounting | Business

Abstract

Purpose – This paper aims to examine the association between internal corporate governance and earnings management and to compare earnings management practices in Islamic banks versus conventional banks in the MENA region.

Design/methodology/approach – This paper uses an unbalanced panel data of 20 Islamic banks and 100 conventional banks, from eleven countries in the MENA region over the period 2012-2017. Discretionary accruals are used to measure earnings management by estimating loan loss provision. Regression analysis is used to test the hypotheses.

Findings – The results indicate that Islamic banks provide fewer earnings management practices compared to conventional banks. Besides, the results show that among the six corporate governance mechanisms studied in this paper only board meetings, board size, and board independence can help in mitigating earnings management for conventional banks. Whereas, for the case of Islamic banks, corporate governance mechanisms have no impact on reducing earnings management.

Practical implications – This paper could offer some recommendations for policymakers, regulators, and users of financial statements. The results of this study could assist in improving the monitoring role of the board of directors and understanding the relationship between corporate governance mechanisms and earnings management.

Originality/value – This paper contributes by investigating the effect of new mechanisms on earnings management, and by examining earnings management practices in Islamic banks compared to conventional banks in unexamined countries and periods.

Keywords Earnings management, Earnings quality, Islamic banks, Conventional banks, Corporate governance mechanisms, Annual reports, MENA region.

Paper type Research paper

English Abstract

Purpose – This paper aims to examine the association between internal corporate governance and earnings management and to compare earnings management practices in Islamic banks versus conventional banks in the MENA region.

Design/methodology/approach – This paper uses an unbalanced panel data of 20 Islamic banks and 100 conventional banks, from eleven countries in the MENA region over the period 2012-2017. Discretionary accruals are used to measure earnings management by estimating loan loss provision. Regression analysis is used to test the hypotheses.

Findings – The results indicate that Islamic banks provide fewer earnings management practices compared to conventional banks. Besides, the results show that among the six corporate governance mechanisms studied in this paper only board meetings, board size, and board independence can help in mitigating earnings management for conventional banks. Whereas, for the case of Islamic banks, corporate governance mechanisms have no impact on reducing earnings management.

Practical implications – This paper could offer some recommendations for policymakers, regulators, and users of financial statements. The results of this study could assist in improving the monitoring role of the board of directors and understanding the relationship between corporate governance mechanisms and earnings management.

Originality/value – This paper contributes by investigating the effect of new mechanisms on earnings management, and by examining earnings management practices in Islamic banks compared to conventional banks in unexamined countries and periods.

Keywords Earnings management, Earnings quality, Islamic banks, Conventional banks, Corporate governance mechanisms, Annual reports, MENA region.

Paper type Research paper

Included in

Accounting Commons

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