Consequences of Earnings Management for Islamic Banks: Evidence from Worldwide, the GCC, and the ASEAN Region
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This study aims to empirically investigate the impact of earnings management (EM) on the performance, stability, and managerial incentives of Islamic banks (IBs). Secondary data was obtained from 75 largest IBs (in terms of their total assets) worldwide from 2009 to 2020. The panel data estimation method was used to carry out the empirical analysis. Regression models were used for estimation on the worldwide sample, along with the samples from the GCC and ASEAN regions, respectively. The results showed the significant negative impact of EM on the internal performance (ROE/ROA) of IBs, both worldwide and in the GCC region. On the contrary, the findings indicated that EM does not exert a significant influence on the internal performance metrics of IBs within the ASEAN region. Additionally, no notable effects of EM on external performance, specifically in terms of stock returns, as well as on managerial incentives, were identified across all three sample sizes under investigation. Conversely, a significant negative relationship between EM and stability, as measured by the Z-score, was observed for all. This research is a pioneering empirical investigation into the effects of EM on the performance, stability, and risk-taking behavior of IBs, thereby providing a more nuanced understanding of its implications within the Islamic banking sector.
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