Do Islamic Banks Employ Less Earnings Management?

Abstract In this article, we examine whether Islamic banks are less likely to manage their earnings than non‐Islamic banks and how Islamic banks’ unique corporate governance system, especially S hari'ah S upervisory B oards, impacts earnings management behaviors within Islamic banks. Using a sample of Islamic banks and their matched non‐ I slamic banks in 15 countries, we find that, first, Islamic banks are less likely to conduct earnings management as measured by both earnings loss avoidance and abnormal loan loss provisions. Second, there are no significantly different earnings management behaviors between Islamic banks with and without S hari'ah S upervisory B oards. Third, several S hari'ah S upervisory B oard characteristics, such as size and the presence of members from A uditing O rganization for I slamic F inancial I nstitutions, are important determinants of the earnings management of I slamic banks who have S hari'ah S upervisory B oards.