This paper investigates whether religious-based index membership is important in mitigating earnings management. Using a large sample of firms domiciled across 12 European countries, our empirical results show that firms included in the Shariah-compliant index, as a proxy for religious index, are more likely to engage in accruals manipulation vis-a-vis non-Shariah-compliant firms. Our results are robust using the Heckman two-stage treatment effect model, weighted least squares model, alternative earnings quality metrics and after controlling for the potential effects of home-country characteristics. (...) Furthermore, our empirical results indicate that corporate governance of Shariah-compliant firms does not constrain managerial opportunistic behaviour in misreporting earnings, and firms that with low scores of board functions, shareholder rights and vision and strategy are more likely to engage in earnings management. Further, Shariah-compliant firms domiciled in Coordinated Market Economies are more likely to manipulate earnings than those in Liberal Market Economies. Taken together, our findings suggest that the Shariah index membership does not indicate good corporate governance that can mitigate earnings management, and it may serve as a legitimacy mechanism to conform to stakeholders’ expectations. Our findings support arguments that the religious-based index membership is plausibly used as a ‘label’ and an impression management tool to attract investment. (shrink)

Based on a sample of 54 Islamic indices over the period 2007–2014, we investigate the effect of Shariah board members' educational background on Islamic indices' risk and return characteristics via the screening criteria. Using a capital asset pricing model benchmark analysis, we assess the sensitivity of Islamic indices to their conventional peers in terms of beta and derive a measure of return (Jensen's alpha). First, we observe that the higher the number of members in common among the boards, the higher (...) the risk–return profile of Islamic indices. Second, commonalities among board members lead to standardization of the screening criteria and to similar Islamic indices' performance. Third, we show that different betas across providers depend on the screening criteria, while the economic educational background of board members affects performance in terms of Jensen's alpha. Our study aims at contributing to the governance literature related to board composition and its importance as a possible driver of performance. In addition, given the impressive growth that Islamic finance has experienced during the last decade, this topic is of great interest to the asset management industry. (shrink)

This paper investigates the short-term effects on the price of the ethically screened stocks of the Dow Jones Islamic Market World Index quarterly revisions. Using a sample of 8250 stocks from May 1999 through June 2012, we find a significant price reaction of the ethically screened stocks following additions and deletions. The results show that additions from emerging stock markets tend to experience a greater and significantly positive price response than additions from the developed markets. Further tests reveal that the (...) price reactions following DJIMWI revisions are likely to be driven by shifts in investor sentiment rather than changes in firm fundamentals. (shrink)