Income Smoothing and Islam: Evidence from Pakistan Shariah Compliant Companies

Abstract

Income smoothing refers to the use of accounting techniques to level out net income fluctuations from one period to the next. Companies indulge in this practice to manipulate the earnings over the period in order to lower the level of uncertainty. The companies with constant earnings attract more investors as they are willing to pay more prices for company's stock. This study examine the presence of artificial income smoothing in 64 Shari'ah compliant companies listed in the financial market of Pakistan for the period 2008-2015. The study also takes into consideration the concept of income smoothing from an Islamic perspective. To achieve the study's objectives, Eckel's index model is used. The study found that 34 percent of the companies are non-smoothers and 66 percent of the companies are smoothers in pooled sample. Among high market capitalized 32 companies, 37.5 percent of the companies are non-smoothers and 62.5 percent are smoothing companies. In 32 low market capitalized companies, 31 percent companies are non-smoothing and 69 percent companies are practicing income smoothing.

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Investigating Income Smoothing: Empirical Evidence From Serbian’s Hotel Companies

“…gross profit, net income), factors leading to income smoothing, tools, motivations, and their effect on companies and stakeholders. One of the most popular models and the most referred to by many researchers to detect the smoothing of accounting income are (Mushtaq, Sultan, & Ijaz, 2016;Altaie, Hammood, & Talab, 2017): 1. model by Copeland and Licastro, 2. model by Imhoff, 3. model by Eckel, 4. Jones model, 5.…”