Sharia Compliance: An Exploration of Earnings Management and Performance in the IDX-IC

Abstract

This study aims to investigate the effect of Sharia compliance on performance and earnings management across all sectors. This research employs an empirical research method, using multiple linear regression and independent-samples t-tests on a dataset comprising 2,243 firm-year observations of companies listed on the Indonesia Stock Exchange over the 2015–2021 period. The findings show that Sharia firms generally perform better than non-Sharia firms. Sectoral analysis reveals that eight out of ten industrial sectors demonstrate superior performance in Sharia firms, while technology and consumer non-cyclicals show no significant difference. Regarding earnings management, no significant differences are observed between Sharia and non-Sharia firms, except in the Transportation and Logistics sector. The theoretical implication of this study extends the literature on the role of Sharia compliance in firm performance, confirming that religious adherence can enhance efficiency and value creation. However, it does not eliminate earnings management practices. The practical implication emphasizes the need for regulators, investors, and corporate managers to strengthen oversight and corporate governance to ensure transparent and accountable accounting practices across both Sharia and non Sharia firms. The novelty of this research lies in its cross industry scope and large-firm-year observations, providing a comprehensive view of performance and earnings management differences between Sharia and non-Sharia firms, which have been underexplored in previous studies.