Shariah compliance and Earnings management: Insights on reporting Transparency and Financial Stability

Abstract

The present study examines the impact of earnings management on financial stability and reporting transparency among Shariah and non-Shariah-compliant firms in India for the period 2008 to 2023. The Study uses Kothari (2005) and Roychodhury (2006) models for the estimation of earnings management proxies. Earnings manipulation and bankruptcy of the sample firms were estimated using the Beneish M-score and Z-score models. The Study reveals that as compared to non-Shariah firms, the Shariah-complaint firms are less prone to earnings management and bankruptcy and it was also found that they are more transparent in reporting their results. Overall, the study confirms that more than a religious indexation, Shariah screening is effective in maintaining ethical conduct of business practices that enhance the protection of investors.