Shariah-compliant Companies Research Articles

POTENSI KUTIPAN ZAKAT PERNIAGAAN SYARIKAT TERSENARAI AWAM DI MALAYSIA: Zakah on Business Potential from Public Listed Companies in Malaysia

The purpose of this study is to estimate potential zakah on business collection and to discover zakah gap from public listed companies (PLCs) segment. This quantitative cross-sectional study examines the zakah status of 817 Shariah compliant companies endorsed by Shariah Advisory Council of the Securities Commission (SC). Financial data is obtained through a census study from the latest annual report and another 705 annual reports were examined. This intensive study, based on the 30% largest shareholder report, reveals that 118 companies are considered ‘owned’ by more than 30 percent of individuals who are Muslim. The total zakah amount during the assessment of eligible companies was then used as the basis for determining ‘zakah potential’. As a result, the total potential of zakah on businesses from PLCs is RM290 million per year. Concerning zakat payment, only 15 companies have zakah disclosure in their financial reports and their total zakah paid is RM76.8 million. This study also reveals gap of RM200 million yearly with a rate of 74 percent. Based on the tax gap rate (i.e around 7 percent) the ‘zakah gap’ discovered is severe and the compliance rate among PLCs are still marginal. Thus, there is a great opportunity to further increase zakah collection and strategic efforts need to be put in place by authorities and relevant parties in order to maximize zakah collection in Malaysia.

The Communication of Islamic Information by Shariah-Compliant Companies in Malaysia

An increase of information consciousness about Islamic related activities among Muslim community motivates this study to investigate the status and determinants of Islamic information disclosed by Shariah-compliant companies in Malaysia.This study finds that Malaysian companies are interested to release information about saddaqa/donation, the safety/quality of the product, preservation of environment and safety workplace.However, Malaysian companies are reluctant to inform their stakeholder about zakat, waqf and the halal status of their products.This study also indicates that female directors and the proportion of Muslim directors influence the communication of certain Islamic information in the annual report.

Investigating of Shariah Compliant Companies Capital Structure Determinants

Investigating of Shariah Compliant Companies Capital Structure Determinants

The relative predictive ability of earnings and cash flows

Purpose – The purpose of this paper is to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India. Design/methodology/approach – The study uses the list of CRISIL NSE Index (CNX) Nifty Shariah Index companies as its sample for a period of 10 years for conducting the analysis. The study utilizes the cash flow prediction models to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows. Findings – The study report that contrary to Financial Accounting Standard Board assertion, current cash flows have superior predictive ability of next period cash flows than current aggregate earnings in case of Shariah-compliant companies in India. The results further show that there are no gains from decomposing earnings into accruals and cash flows in predicting future cash flows. There is no increase in explanatory power (measured by adjusted R2) when aggregate earnings are disaggregated into accruals and cash flows to predict next period cash flows. Practical implications – The empirical findings of the study will enable the Shariah compliant investors to understand the role of current earnings (and its components) and cash flows in predicting next period cash flows in case of Shariah-compliant companies in India. Originality/value – To the best of author’s knowledge, this is the first study which examines the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.

The quality of earnings in Shariah-compliant companies: evidence from Malaysia

Purpose– The purpose of this study is to examine the quality of reported earnings in the corporate reports of Shariah-compliant companies listed on Bursa Malaysia.Design/methodology/approach– This study hypothesises that companies with Shariah compliance status have higher quality of earnings because of 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. The study uses a balanced panel data of 3,048 observations from 508 companies during a six-year period of 2003-2008.Findings– This paper finds robust evidence that Shariah-compliant companies have significantly higher earnings quality compared to other firms. The results provide support for the arguments that Shariah-compliant companies supply a higher quality of reported earnings to attract foreign investment, have greater demand for high-quality financial reporting because of their Shariah status and are subject to greater scrutiny by regulators and institutional investors.Research limitations/implications– This study contributes to the existing literature on Islamic capital market, business ethics, firms’ governance and financial reporting quality. The study would give a better understanding on issues relating to earnings quality of Shariah-compliant companies and would be especially useful for financial statement users, including investment analysts.Originality/value– This paper provides evidence on the quality of earnings in Shariah-compliant companies and offers new arguments that explain why such companies possess higher quality of earnings compared to their counterparts.

Capital Structure of Shariah-Compliant Companies in Malaysia

The study looks at the determinants of capital structure of listed Shariah-compliant companies in Malaysia. It presents a study of the companies included in the Top 100 publicly listed companies in the Main Board of the Bursa Malaysia over the period of 2009 to 2011. The study applies 4 independent variables which are asset tangibility (TANG), growth opportunities (GROWTH), profitability (PROF) and firm size (SIZE while the dependent variable is debt ratio (DR). Panel data analysis on fixed effect model is used in this study. The findings of the study reveal that the debt ratio of Shariah-compliant firms is proved to be significant with growth opportunities and firm size but insignificant with asset tangibility and profitability. This has suggested that the factors are inconsistent for Shariah and non-Shariah compliant companies in determining the capital structure of public listed companies in Malaysia.

Manipulation of Earnings: The Pressure of Opportunistic Behavior and Monitoring Mechanisms in Malaysian Shariah-compliant Companies

Abstract The cases of large corporate scandals such as Enron, WorldCom and Xenox; resulted in to the escalation the scrutiny towards the accounting and auditing profession. Due to that, this study is intended to examine the influence of opportunistic behaviour and monitoring mechanisms towards EM. Real Earnings Management is a method to stage-manage the financial accounting proxy by abnormal cost of goods sold (COGS), abnormal cash flow from operation (CFO) and abnormal discretionary expenses (DISEXP). This study employs 2,955 of Shariah-compliant companies for a period of five years from 2009 to 2013. Several statistical analyses were carried out to observe the influence of opportunistic behaviour and monitoring mechanisms towards EM. Data are drawn from Bursa Malaysia website (annual reports) and Thomson Datastream (financial data). The findings of this study revealed that opportunity behaviour and monitoring mechanisms have significant affiliation with EM. The results should be of interest to the stakeholders, shareholders and regulatory bodies such as Shariah Advisory Council (SAC) and the Securities Commission (SC) to superintend the accountability of corporate financial reporting in the deterrence of EM in Shariah-compliant companies.

Earnings Management Through Deferred Taxes Recognized Under IAS 12: Evidence From Pakistan

This study examines earnings management through deferred taxes calculated under the IAS 12 and its impact on firm valuation. The literature finds that book–tax nonconformity leads to better earning quality and a greater association between earnings and future expected cash flows. Given that Pakistan is a pioneering implementer of the International Financial Reporting Standards, our hypothesis is that the components of deferred tax disclosed under the IAS 12 provide value-relevant information to equity investors. We divide deferred tax components into three categories: those arising from (i) operational activities, (ii) investing activities, and (iii) financing activities. These are subdivided to ensure that no value-relevant component is aggregated with a nonvalue-relevant component, which might otherwise lead to an information slack. Our sample includes data on shariah-compliant companies listed on the Karachi Meezan Index (KMI-30). We find that deferred tax line items in firms’ balance sheets are reflected in market prices. Investors also tend to treat deferred tax line items (arising from operating, financing, and investing activities) differently. Furthermore, the value relevance is dissimilar for different components of deferred tax. Investors are wary of deferred tax assets and liabilities when pricing and are likely to penalize firms with a higher deferred tax position.

The Impact of Underwriter Reputation and Risk Factors on the Degree of Initial Public Offering Underpricing: Evidence from Shariah-Compliant Companies

IPO underpricing is an important factor used by investors to predict the profit from investment activities. Numerous empirical researches report the existence of IPO underpricing in various investment environments around the world. However, what the factors that result in such underpricing vary by country and those factors are still largely unexplored. This underpricing phenomenon is difficult to understand because various issues are related such as companies’ performance, government policy and economic condition. Thus this paper investigates the average degree of IPO underpricing listed on the Malaysian Stock Exchange (MSE) using data from 476 IPOs that occurred from 2000 to 2011. MSE is a unique stock exchange because it has two types of boards which are the shariah-compliant board and the non shariah-compliant board. 89 percent of the IPO companies are listed on the shariah-compliant board. This paper has two objectives. Firstly, this paper investigates the average degree of IPO underpricing for shariah-compliant companies and non shariah-compliant companies. Secondly, this paper investigates the impact of underwriter reputation and risk factors on the average degree of IPO underpricing. The results show that the average degree of IPO underpricing for shariah-compliant companies is 28.82 percent which is quite similar to that of non shariah-compliant companies which is 26.63 percent. Using multiple linear regression analysis this study finds that the IPO underpricing for shariah-compliant companies is driven by risk factors.

New Improved Reporting Index of Corporate Social Reporting for Shariah-compliant Companies

The purpose of this paper is to construct a new modified reporting index for shariah-compliant companies. This new reporting index adheres to the Islamic Advisory Council's guidelines and is validated by the principal component analysis, which establishes a link between internal reporting of shariah-compliant companies and external reporting needs of the community and the public. Overall reporting index quality for shariah-compliant companies is found to be more of standard when variable selection method of t-statistic algorithm under the principal component analysis suggests that the strongest themes for the items of information in the index comprise two themes, which include Finance and Investment, and the Society.

Implications of Shariah on the voluntary disclosure of Indonesian listed companies

Purpose – The purpose of this paper is to investigate and compare the extent of voluntary disclosure in the annual reports of Shariah- and non–Shariah-compliant companies in Indonesia. Further, the study examines the relationship between voluntary disclosure and company characteristics (i.e. size of company, profitability, type of auditor, type of industry and ownership structure). Design/methodology/approach – Voluntary disclosure was measured using a disclosure index with 30 items and content analysis of the 2009 annual report. Statistical analysis included descriptive, Mann–Whitney U and regression. Findings – The result revealed that there is a statistically significant difference in the quantity and quality of voluntary disclosure value of Shariah- and non–Shariah-compliant companies. For regression results, the company size significantly influences the quantity of voluntary disclosure while the quality of voluntary disclosure is affected by company size and type of industry. Research limitations/implications – Although this study only analyses voluntary disclosure in the annual report for a single year (2009), it is hoped to provide a description of the voluntary disclosure in Shariah- and non–Shariah-compliant companies. Practical implications – The findings might be used by regulators to set regulations that encourage the quantity and quality of disclosure practice of Shariah-compliant companies to expand the scope of disclosure related to religious activities. Originality/value – This study measures voluntary disclosure using the disclosure index based on Indonesian regulations and the quantity and quality measurement of Shariah-compliant companies, which may differ from previous Indonesian studies.

The Red Flags of Tax Reporting on the Market Value

The aim of this paper is to provide empirical evidence of the red flags in the level of tax reporting among theShariah Compliance companies in Bursa Malaysia. The convenience sampling method was employed among123 Shariah compliance companies of Bursa Malaysia. Meanwhile, the investigation period in this study hadcovered twelve years of continuous data, starting from the year 2001 until the year 2012. This study adopted theCurrent Based Model to calculate the level of Effective Tax Rate (ETR) as an independent variable while thefirm values as dependent variable. It was revealed that due to the Creative Accounting strategies, there is apossibility of tax fraud occurring during the calculation of taxation level. These activities, which were applied inimplementing tax planning mechanisms is however allowed by the GAAP under MFRS. As is commonly known,the purpose of tax reporting is to safeguard the interest of potential shareholders; however, these practices ofaggressive tax planning strategies will result in differing perceptions from tax payers’ and potential shareholders’perspectives. Therefore, aggressive tax planning strategies could be a red flag to financial fraud activities. Thus,this study would disclose some evidence on how financial fraud could be revealed from tax reporting strategies.

The quality and determinants of voluntary disclosures in annual reports of Shari'ah compliant companies in Malaysia

PurposeThe aim of this study is to investigate the quality of voluntary disclosure practices by Shari'ah compliant companies (ShCCs) in Malaysia. The study also examines factors influencing the quality of voluntary disclosures.Design/methodology/approachUsing a weighted disclosure analyses approach, a self‐constructed disclosure checklist was developed to measure the quality of corporate voluntary disclosures (CVDs). The study examines the annual reports of a sample of 76 ShCCs selected from various sectors listed on Bursa Malaysia in the year 2009.FindingsThe results indicate that the quality of voluntary disclosures by ShCCs is in overall low consistent with prior studies that gauged the quality of CVDs in Malaysia. The multivariate regression analyses reveal that board size is significant in explaining the quality of CVDs at the 5 percent significance levels. Company size and leverage as control variables are also significant at the 1 and 10 percent significance levels in determining the quality of CVDs by ShCCs. The reduced regression model further indicates that government ownership is highly significant at the 1 percent significance level in explaining the quality of CVD by ShCCs while leverage is significant at the 5 percent levels.Practical implicationsThe low level of corporate disclosures by the ShCCs in Malaysia suggests that these companies require awareness on matters relating to the concepts of accountability and full disclosures in becoming accountable to the community. Hence, the Shari'ah Advisory Council of the Securities Commission Malaysia should provide awareness on matters relating to accountability and transparency which could lead to socio economic justice. The commission may also introduce a detailed reporting guideline for the companies to follow.Originality/valueThis study provides useful insights on the disclosure quality of ShCCs in Malaysia which remained largely unexplored. The study also represents the first empirical investigation toward the association between voluntary disclosures by ShCCs and corporate governance attributes in the Malaysian context.

A Study on Timeliness of Income Recognition for Shariah Compliant Companies: A Malaysian Evidence

A Study on Timeliness of Income Recognition for Shariah Compliant Companies: A Malaysian Evidence

Income Smoothing and Islam: an Evidence from Malaysian Shariah Compliant Companies

Income Smoothing and Islam: an Evidence from Malaysian Shariah Compliant Companies

The Trend of CSR Disclosures and the Role of Corporate Governance Attributes: The Case of Shari'ah Compliant Companies in Malaysia

This study examines the trend of corporate social responsibility (CSR) disclosures and the role of corporate governance attributes in the CSR disclosures of Shari’ah compliant companies (ShCCs) in Malaysia for the years 2006 and 2009, a period which corresponds before and after a plethora of significant changes in Malaysia, encompassing the recent financial crisis and policy changes in the form of corporate governance restructuring. Using a CSR disclosure checklist, the extent and quality of CSR discourses of a sample of 76 ShCCs was examined. The results indicate that the extent and quality of CSR disclosures by the ShCCs is in overall low. However, there was a significant increasing trend in both the extent and quality of the CSR disclosures by the ShCCs over time. results of this study offer a number of practical implications. First, whilst the findings reveal a significant increasing trend of CSR information subsequent to the policy changes and the recent financial crisis, the CSR information was however not systematically provided, with most of the disclosures being stated in a narrative form. Hence, the policy makers in Malaysia may want to re-enforce the mandatory requirement of CSR information and provide a detailed CSR framework for the companies to follow such as "what" and "how" the CSR information should be disclosed. Second, the role of corporate governance attributes in the social disclosures of the ShCCs did not improve following the revised code, perhaps due to the unfolding recent global financial turmoil which may have undermined the effectiveness of the corporate governance attributes. <br />Finally, this study offers the first empirical study to have assessed the trend of CSR disclosures and the role of governance attributes in CSR disclosure practices by the ShCCs.

The Management of Reported Earnings in Shariah-Compliant Companies: A Panel Data Analysis of Accrual Quality

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.

Islamic norms for stock screening

PurposeThe purpose of this paper is to compare the criteria used among Islamic Indices, specifically between the Kuala Lumpur Stock Exchange Shari'ah Index (KLSESI) and the Dow Jones Islamic Market Index (DJIM) in screening a permissible company for investment purposes. The two controversial criteria examined are: level of debt and level of liquidity of company.Design/methodology/approachThe paper investigates the 642 companies listed on the Bursa Malaysia in 2006 as approved Shariah's compliant companies by the Shari'ah Advisory Council of the KLSE.FindingsOverall, the results reveal that the KLSESI does not use both the criteria set by the DJIM as its measures during the screening process. As for the level of debt criterion, the results show that 44.07 percent of the companies listed under the KLSESI are highly geared. These companies depend heavily on debt to finance their capital. However, the results for the level of liquidity criterion are not as extreme as the level of debt where it shows only 17 percent of the companies listed under the KLSESI are highly liquid. The results also indicate that if both criteria are compared concurrently, only 198 out of 565 companies listed under the KLSESI conform to the criteria set up by the DJIM.Research limitations/implicationsThe main reasons why the differences exist among Islamic Indices are due to micro‐factor as faced by Malaysian companies such as the limited amount of capital resources. The Shari'ah supervisory board of the respective indices represents the sole body that determines the rules or criteria to be used by each index. This explains why the indices differ from one country to another and efforts should be done by regulators in the respective countries to harmonize the differing criteria used.Originality/valueThe paper represents the first study that compares the criteria used by two different indices regarding Islamic capital investment in a developing country.

Evaluating company's performance using multiple discriminant analysis: the case of Shariah compliance companies

There are many tools that can be used to measure/evaluate the performance of a company and one of the most popular tools is using the financial ratios. This paper will explore the use of a combination of two different techniques using the time series data of share and market prices collected from Shariah compliance companies and cross-sectional financial ratios data of Shariah compliance companies. Share prices from 201 Shariah compliance companies listed in the Bursa Malaysia stock exchange were collected from 2000 to 2005 with their respective 2005 financial ratios. The Jensen Alpha technique is employed to classify the Shariah compliance companies in the Main Board Bursa Malaysia into two categories, i.e. performing and non-performing. Next, multiple discriminant analysis (MDA) technique is employed in identifying the ratio(s) that significantly influence the performing and non-performing companies. The MDA result shows that shareholders fund/share or net tangible asset ratio could differentiate significantly the non-performing and performing Shariah compliance companies.

Performance ofShariahcompliance companies in the plantation industry

Purpose – The purpose of this paper is to identify the performing and non‐performing companies by using multiple discriminant analysis (MDA) and multiple regression and the ratios that could distinguish between the performing and the under‐performing companies.Design/methodology/approach – First, the study applied the α Jensen technique to classify the Shariah compliance companies into performing and non‐performing. Then, the results from the α Jensen technique with 20 financial ratios are applied to MDA in order to establish models that are used to identify non‐performing and performing companies.Findings – The growth turnover ratio is the only ratio that could discriminate between the performing and non‐performing companies in the plantation industry.Research limitations/implications – The paper only investigates a sector in the main board of Bursa Malaysia, which is the plantation industry. Future research may look into the whole Shariah counters in Bursa Malaysia.Practical implications – The paper cou...