Do Shariah Complaint Companies Indulge in Income Smoothing? Evidence from Pakistan

Abstract

The purpose of this paper is to discover the existence of income smoothing in the Pakistani Shariah complaint companies. Although theory of Islamic finance does not renounce profit smoothing, this study will observe the type of smoothing behavior taken on by the executives. Real smoothing and artificial smoothing are the two types of income smoothing. For decreasing income variability real smoothing encompasses on making production and speculation decisions. In contrary, artificial smoothing is achieved through accounting practices. We tested our study on 30 Shariah complaint companies in Pakistani capital market while using the artificial income smoothing over the period of 2008-2012. We concluded that 26.67% of the companies are artificial income smoothers.