Purpose This paper aims to examine the impact of Shari’ah supervisory boards (SSBs) on the performance of Islamic banks (IBs). It also tests whether SSBs’ attributes affect the performance of IBs. Based on a sample of 1,803 Islamic bank-year observations from 82 banks in 15 countries over the period 1993-2014 and controlling for factors known to affect bank performance, this study reveals a robust and significant positive relationship between SSBs and Islamic bank performance. This study also shows that the characteristics of SSBs affect the performance of IBs. This research reveals how SSBs influence the performance of IBs, as well as the processes and roles SSBs use to ensure Shari’ah compliance in business transactions. Design/methodology/approach The purpose of this study design is to relate SSB presence, size and diversity to financial performance using three techniques. The first technique is a multivariate data analysis that analyzes data arising from more than one variable. The second technique is a clustered regression (clustering by bank), which corrects for serial correlation and produces unbiased t-statistics. Because this sample is drawn from panel data, it is expected serial autocorrelation of the independent variables and error term within banks. In cases where within-company correlation exists, t-statistics based on average regression coefficients from year-by-year regression are upwardly biased and potentially severe (Peterson, 2009). Therefore, this study uses a technique that agrees with Stock and Watson (2002), who show that the standard method of calculating heteroskedasticity-robust standard errors for the fixed-effects estimator generates inconsistent variance estimates. Thus, using the clustered regression is consistent with the fixed-effects estimator. The third technique is a two-stage least-squares regression that helps build an instrumental variable for robustness tests purposes. Findings The findings suggest that large corporate boards and large SSBs are more efficient in dealing with different monitoring and advisory roles than small SSBs. Consequently, this suggests that increasing the size of corporate boards and SSBs should improve monitoring and advisory functions, management behavior and organizational performance. Research limitations/implications It is possible that there is an upper limit to this benefit, however; we do not explore this limit, which therefore provides opportunities for additional research. Because Shari’ah compliance relates only to a rational legal framework of negative screening relegated to interest prohibition and limiting uncertainty. The interest prohibition and limiting uncertainty have not been investigated between the two samples due to data unavailability. In addition, limited accounting-based measures of financial performance may not accurately portray IB performance; hence, an additional market measure is implemented, which is Tobin’s Q. Practical implications Ultimately, these findings could help IBs improve their financial results by enhancing their internal and external governance mechanisms (Walsh and Seward, 1990). They provide a basis for developing larger, more diverse SSBs that are more focused on complying with Shari’ah and corporate governance. The results also have significant policy implications for improving firm-level corporate governance versus improving country-level institutional factors. Both views have their advocates. However, it is very difficult to reform the legal system in a short time. Still, this study shows that struggling IBs have a way to improve their corporate governance and simultaneously improve their financing environment. Originality/value This research contributes to the literature on the effects of SSBs on IBs’ organizational financial performance, processes and roles. It is the first to examine empirically the underpinnings of how SSBs affect organizational financial performance via agency theory and contingency theory.

PurposeThe purpose of this paper is to examine the relation between a company's bid‐ask spread, a proxy for information asymmetry, and auditor tenure and specialization.Design/methodology/approachThe tests use clustered regression for a sample of 31,689 company‐years from 1992 to 2001 and control for factors known to impact bid‐ask spread in cross‐section.FindingsThe findings suggest that the market's perception of disclosure quality is higher and private information search opportunities are fewer for companies engaging industry specialist auditors. In addition, the paper finds that information asymmetry has a U‐shaped relation to auditor tenure. This U‐shaped relation holds for both specialists and non‐specialists; however, the bid‐ask spread for specialists tends to fall below that of non‐specialists at all tenure intervals.Research limitations/implicationsThe findings may directly result from auditor tenure and specialization or it may be that those auditor‐related characteristics are a subset of concurrent choices made by the company that impacts disclosure quality.Practical implicationsCompanies have incentives to lower information asymmetry and the findings document that the choice of a specialist auditor and the length of the auditor relationship can potentially influence this objective.Originality/valueThe paper provides information to academics, regulators, companies, and auditors concerning the effect of auditor‐client relationships on the level of information asymmetry. In addition, it shows the importance of industry specialization and audit firm tenure on audit quality.

No abstract

Purpose -The purpose of this paper is to examine the impact of institutional holdings and corporate debts on audit quality, proxied by auditor industry specialization. Design/methodology/approach -The tests use regression analysis for a sample of 396 companyyears from 2003 to 2008 and control for factors known to affect auditor industry specialization. Findings -The results show a positive association between institutional ownership and auditor industry specialization. These results are consistent across most measures of auditor industry specialization and different thresholds of audit firm market share. In addition, a positive link is reported between corporate debt and industry specialization by auditors. This result, however, holds under the composite proxy in terms of total assets only.Research limitations/implications -The major limitation is the unavailability of data on audit fees and sales (revenues) to measure auditor market share. Practical implications -Institutional investors and debtholders have preference for auditors who can enhance the credibility of financial reporting and improve the quality of financial information and the results document that the choice of specialist auditors can potentially influence this objective. Originality/value -The paper provides information to academics, regulators, companies, and auditors concerning the impact of institutional investors and creditors on the choice of industry specialists. Also, it shows the importance of industry specialization on audit quality.

Purpose The purpose of this paper is to examine whether foreign directors’ influence on opportunistic behavior among managers varies between Islamic banks (IBs) and conventional banks (CBs). It also examines how religious ethics and morals guide foreign directors to be better monitors. Design/methodology/approach A panel fixed effects regression is used to analyze the effect of foreign directors on opportunistic behavior among managers in IBs and CBs. The authors use different proxies such as loss avoidance, discretionary loan loss provision and expense preference behavior to measure management opportunistic behavior. Findings Based on sample of 3,758 bank-year observations for 164 banks over the period 1993-2015, the authors show that the presence of foreign directors in IBs increases boards’ effectiveness in impeding management opportunistic behavior, whereas the presence of foreign directors in CBs reduces boards’ effectiveness in curbing management’s unethical acts. The authors also document that IBs (CBs) with foreign directors demonstrate less (more) earnings management and expense-preference behavior among managers. In addition, the authors’ evidence indicates that the existence of the Shari’ah supervisory boards helps foreign directors be more effective monitors. Research limitations/implications The current study focuses on banks only which makes its results subject to sample bias; there are many other forms of financial institutions (e.g. investments, real-estates and mutual funds) complying to the Shari’ah law. Second, owing to the lack of foreign board directors characteristics, the authors cannot investigate the intensity of the specific characteristics that could have specific directions in affecting managerial behavior. Practical implications The findings in this paper may help standards-setters, auditors, investors and regulators take appropriate measures and create better policies that reduce managers’ discretion. This could in turn improve information transparency decision-making, monitoring, advising and accounting quality. Originality/value The authors’ theoretical framework combines the agency, contingency, resource-dependence, stewardship and stakeholders’ theories and applies them to Shari’ah as an alternative ethical and internal governance mechanism. The authors find that the impact of foreign directors on management opportunistic behavior depends on the corporate religious norms within boards of directors, in particular, suggesting that religious values affect how foreign directors influence bank managers’ behavior.