Faith, Finance, and Financial Reporting: Shariah Governance and Earnings Management in Pakistan

Abstract

This study investigates whether Shariah governance reduces earnings management more effectively than traditional corporate governance in Pakistan's banking sector. Using a panel dataset of 60 firm-year observations from six banks (2016-2025), the research employs descriptive statistics, mean difference tests, correlation analysis, and pooled OLS regression. Findings reveal that Islamic banks differ significantly from conventional banks in governance features, particularly board size and public shareholding. However, earnings volatility—proxying earnings management—shows no significant difference between banking models. Board size positively and significantly affects earnings outcomes (β = 0.441, p = .001), while Shariah identity shows a significant negative coefficient in profitability models (β = -1.217, p = .001). Yet, Shariah governance does not substantially explain earnings volatility, indicating limited evidence of its superiority in constraining earnings management. The study highlights the importance of board composition and ownership characteristics over religious governance alone in affecting financial reporting outcomes.