Corporate governance and accounting conservatism in Islamic banks

Abstract

We examine whether Islamic banks are more likely to be conservative in their financial reporting than conventional banks, as well as how Islamic banks' unique corporate governance system affects accounting conservatism behaviors. Using a large sample of Islamic banks and their matched non‐Islamic banks; based on total assets and geographic location, in 15 countries, we find Islamic banks are more likely to deploy accounting conservatism as measured by loss avoidance, abnormal loan loss provisions, and C‐score, respectively. Islamic banks are about 95% more likely to be more conservative in accounting practices than their counterparts, depending on different model specifications. In addition, we report several board characteristics, such as size, independence, reputation, tenure, and diversity, are important determinants of accounting conservatism in Islamic banks. This relationship indicates certain board traits lead to greater monitoring roles, consequently reducing unethical behavior and increasing the degree of conservatism in accounting practices.

Nudging toward diversity in the boardroom: A systematic literature review of board diversity of financial institutions

“…In our sample literature, 14 studies are grouped in this category. Two of them focused on the bailout of banks in European countries (Cardillo et al, 2020; Fernandes et al, 2016), capital structure (Adusei & Obeng, 2019; Palvia et al, 2014), intellectual capital (Al‐Musali & Ismail, 2015), innovation (Iren & Tee, 2018), conservatism accounting (Almutairi & Quttainah, 2019; García‐Sánchez et al, 2017), and ethical reputation (Baselga‐Pascual, Trujillo‐Ponce, Vähämaa, & Vähämaa, 2018). These topics have also received less attention to financial institution researchers, and more researches are encouraged to explore these topics with board diversity attributes.…”

The Effect of the Relationship Between Accounting Conservatism and Cost of Debts on Cash Holding: Evidence from Egyptian Listed Companies

“…The research was carried out on a sample of companies, and the findings revealed that the relationship between accounting conservatism and corporate governance indicates a significant impact of corporate governance variables such as board of directors and audit committee characteristics on accounting conservatism. (Almutairi & Quttainah, 2019) investigate whether Islamic banks are more conservative in reporting financial statements than conventional banks, and how corporate governance in Islamic banks influences accounting conservatism. According to the findings, Islamic banks are more prone to use accounting conservatism, as seen by loss avoidance and anomalous loan loss reserves., Islamic banks are 95 percent more likely than their counterparts to be more conservative in their practices.…”

Board of Director Characteristics, Institutional Ownership, and Accounting Conservatism

“…Therefore, a large board reduces accounting conservatism level (Abdul-Manaf et al, 2014;Boussaid et al, 2015;Nasr & Ntim, 2018) Although there are two different views, this study assumes that a large board increase accounting conservatism. Many board members will increase effectiveness and performance, mainly in building networks and accessing economic resources (Almutairi & Quttainah, 2019;Kiel & Nicholson, 2003). Although many board members lead to significant agency costs, the benefits obtained are more significant than those incurred (Coles et al, 2008).…”