Earnings management behaviors under different monitoring mechanisms: The case of Islamic and conventional banks

We investigate the impact of organizational religiosity on the earnings quality of listed banks in the Middle East and North Africa region. We analyze Islamic banking institutions, which operate within strict religious norms and extended accountability constraints, and compare them with their conventional counterparts during 2008-2013. We find that Islamic banks are less likely to manage earnings and that they adopt more conservative accounting policies. Based on these findings, we argue that religious norms and moral accountability constraints in these organizations have a significant impact on financial reporting quality and agency costs, which have implications for both regulators and market participants.