Naseem Al Rahahleh, Serkan Akguc and Turki Abalala
The purpose of this paper is to examine the operating performance of Dow Jones Islamic Index (DJII) firms vs non-DJII firms. It also explores the impact of the 2007–2008 financial…
Abstract
Purpose
The purpose of this paper is to examine the operating performance of Dow Jones Islamic Index (DJII) firms vs non-DJII firms. It also explores the impact of the 2007–2008 financial crisis on the operating performance of firms included under DJII relative to a comparable set of firms (i.e. industry-size matched) that are not included in the DJII.
Design/methodology/approach
The final sample consisted of 1,128 unique firms (or 5,669 observations) in the DJII sample and 9,501 unique firms (or 55,889 observations) in the non-DJII sample. The paper uses a unique dataset from S&P’s Compustat North America database during the period of 2005–2014. This study uses univariate tests complemented with multivariate regression analysis to gain further insight into the influence of Shariah compliance on the operating performance of firms during the crisis.
Findings
The paper shows that DJII firms were more profitable than non-DJII firms during the sample period. In addition, DJJI firms’ profitability was not affected as much during the financial crisis as non-DJII firms. This finding is robust to various model specifications and to alternative definitions of operating profitability.
Research limitations/implications
Corporate governance and managerial characteristics and the possible effects of these on operational performance are not considered herein.
Practical implications
Investors and fund managers could benefit from investing in Islamicly permissible equity funds when constructing investment portfolios in regard to asset allocation and policy responses to financial crises.
Originality/value
The present paper uses a unique sample and timeframe to show that the characteristics that makes a firm Shariah-compliant also leads to much higher operating profitability and reduces the impact of the financial crisis on firm profitability.
Details
Keywords
Khalid Al-Amri, Saif Al Shidi, Munther Al Busaidi and Serkan Akguc
The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council…
Abstract
Purpose
The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area.
Design/methodology/approach
The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management.
Findings
The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction.
Research limitations/implications
The results of this study might not be applicable to other emerging markets.
Practical implications
The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market.
Originality/value
This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.