Abstract
Dependence on manipulated or managed reported earnings will result in misappropriation of assets and lead to poor investing and financing decisions. Consequent on the importance of reported earnings as a primary source of information, this study examines the quality of reported earnings in the corporate reports of Shariah compliance companies listed on Bursa Malaysia. We hypothesize that companies with Shariah compliance status have higher quality of earnings due to greater demand for and supply of high-quality financial reports. The quality of reported earnings is measured using the cross-sectional Dechow and Dichev (2002) accrual quality model. Employing a balanced panel data of 3,048 observations from 508 companies during a six-year period of 2003-2008, we find robust evidence that Shariah compliance companies have significantly higher earnings quality compared to other firms. The results provide support for the arguments that Shariah compliance companies: supply a higher quality of reported earnings to attract foreign investment; have greater demand for high- quality financial reporting due to their Shariah status, and are subject to greater scrutiny by regulators and institutional investors.
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