Accounting standards and value relevance of accounting information: a comparative analysis between Islamic, conventional and hybrid banks

Abstract

PurposeThe purpose of this study is to investigate the value relevance of accounting information for Islamic, conventional and hybrid banks. It also investigates the moderation impact of IFRS adoption and AAOIFI mandatory adoption on value relevance of accounting information.Design/methodology/approachUsing value relevance models, The authors run panel data regressions on 47 Islamic banks, 112 conventional banks and 42 hybrid banks (conventional banks with Islamic windows). The study covers listed banks from 14 countries over the period 2010–2018.Findingspaper offers three empirical evidences. First, the authors find that value relevance of accounting information is higher for Islamic banks, compared to conventional banks. Second, the authors find that IFRS framework strengthens the relevance of accounting information in Islamic banks, but the authors did not find the same for hybrid banks. Third, the authors find that the mandatory adoption of AAOIFI accounting standards has a moderation effect on value relevance of accounting information for both Islamic banks and hybrid banks. The robustness analysis shows that there is a significant contribution of compliance with Islamic Finance rules in IBs and HBs, which substantially reduces managers' opportunistic behavior to manage accounting information.Research limitations/implicationsOne limit of this research is the reduced number of sampled listed IBs since the authors deleted countries that do not have both listed Islamic and conventional banks.Practical implicationsThe study is useful for investors that consider the Islamic ethical practices to make their investment decisions as well as for the standards-setting bodies that focus on establishing accounting standards for the Islamic banking industry.Originality/valueThe authors contribute to the value relevance literature by providing novel evidence on the value relevance in fully-fledged Islamic, fully-fledged conventional and hybrid Banks. The authors also provide new evidence on the moderating role of International Financial Reporting Standards (IFRS) and Auditing Organization for Islamic Financial Institutions standard (AAOIFI) for the value relevance of accounting information.

Comparing the value-relevance of AAOIFI versus IFRS accounting numbers in the Takaful industry

“…Our findings are consistent with those of Anandarajan et al (2011) and Agbodjo et al (2021) who argue that increased disclosure has a significant impact on investors’ understanding and interpretation of financial statement figures. Greater disclosure indicates a better grasp of the issues influencing the data that underpin reported earnings, lowering stock market value.…”

“…Our paper contributes to the literature by identifying an underexplored aspect of the topic of value relevance under the setting of the Islamic Finance framework, and, more particularly, under the new channel of the AAOIFI Financial Accounting Standards (FASs). Although few studies investigated the value relevance of accounting earnings for Islamic banks (IBs; Agbodjo et al , 2021), value relevance using the channels of AAOIFI versus IFRS in TC has not been explored. AAOIFI standards are issued to offer a Sharia-compliant framework for IFIs including TC.…”

Sharia governance standards and the role of AAOIFI: a comprehensive literature review and future research agenda

“…Early studies focused on the need for the Islamic accounting and need for the Sharia standards for the Islamic financial institutions (Mohammed et al , 2019; Mohammed Sarea and Mohd Hanefah, 2013). A large amount of literature such as Agbodjo et al (2020), Mohammed Sarea and Mohd Hanefah (2013), Mukhlisin (2017) and Zulkhibri and Ghazal (2014) discussed the role of standardization in financial reporting of the IFIs.…”

Quality Of Financial Statement And The Factors That Influence It

“…This study measures the application of accounting standards based on the views of (Agbodjo et al, 2021); and the International Accounting Standards Board (2018), with regulatory measurement tools, human resources, and supporting systems and facilities. Internal control system measurements follow (Mulyadi, 2017), namely organizational structure, methods and measures, accuracy and reliability of accounting data, encouraging efficiency, and compliance with management policies.…”

“…Accounting standards are standard guidelines for presenting good-quality financial reports. These standards are accounting principles applied in preparing and presenting financial reports (Agbodjo et al, 2021). Government accounting standards are accounting principles in preparing and presenting government financial reports (Miyauch and Sanada, 2019).…”