Sharia compliance shows that the compliant company operates not only under the regulations but also to the restrictions and permission of Islam. The primary sources for the compliance are Holy Qur’an and Sunnah. In other words, one may expect a Sharia compliant company to act in a higher of degree of ethics. This research reveals the behavioral differences of earnings management between Sharia compliant and non-compliant companies with cross-listing, Islamic financial elements and for specifically during the Sub-Prime Mortgage Crisis Period (2007-2009) with six different models. The sample is constructed from 16 Muslim majority countries, 1,833 companies for the periods between 2006 and 2016. Earnings management is measured as with Kothari, Leone and Wasley (2005) and Roychowdhury (2006) for discretionary accruals and real activities manipulations respectively. According to the results, Sharia compliance has an upwards effect on the discretionary accruals, while cross-listing decreases the discretionary accruals, regardless of compliance. Also, the results showed that Sharia-compliant cross-listed companies are more conservative with the accruals compared to their non-compliant counterparts. According to the real activities manipulation model, regardless of compliance, companies managed their upwards using their real activities but Islamic financial elements created decreases in the earnings management via real activities.
Keywords: Earnings Management, Sharia Compliance, Cross-Listing, Discretionary Accruals, Real Activities Manipulations
JEL Classification: G38, M42, M49
Can, C. (2018) Does Sharia Compliance Affect the Earnings Management of Companies in Muslim Majority Countries?