Can corporate governance mechanisms reduce earnings-management practices in Islamic banks?

Abstract

PurposeThis study aims to provide empirical evidence on the role of corporate governance mechanisms in reducing earnings-management practices in Islamic banks in Asia.Design/methodology/approachThis study used 28 Islamic banks in Asia, which were listed on the stock exchange from 2013–2017. The research method used quantitative regression with data on the characteristics of Islamic banks taken from the websites of each bank. This study used discretionary loan loss provision as a proxy for measuring earnings management.FindingsThe results show that only the audit committee size has a significantly negative effect on earnings management. An independent audit committee has a negative, but not significant, effect. The difference expectation signs cannot be interpreted further.Research limitations/implicationsOnly a few components of corporate governance were tested in this study. Therefore, it is expected that future studies will include more components.Practical implicationsIn general, the components of corporate governance that include the characteristics of the board of directors and the audit committee have a varied effect on reducing the earnings-management practices in Islamic banks, except audit committee size. In practice, audit committee size should have an important role in earning management reduces.Originality/valueThis may be the first paper that studies the effect of corporate governance on earnings management in Islamic banks in Asia.