The Role Of Sharia Compliance: An Exploration Of Earnings Management And Performance In The IDX-IC Sector

Abstract

This study aims to investigate the effect of Sharia compliance on performance and earnings management across all sectors. The study uses multiple linear regression and independent t-tests to examine 2,243 firm-year observations listed on the Indonesia Stock Exchange during the 2015–2021 period. The findings show that Sharia firms generally perform better than non-Sharia firms. Furthermore, sectoral analysis shows that of the ten industrial sectors investigated, eight show better performance in Sharia firms. The remaining two sectors showed no significant difference between Sharia and non-Sharia firms, namely technology and consumer non-cyclicals. In terms of earnings management, no significant differences are observed between Sharia and non-Sharia firms, except within the Transportation & Logistics sector. The theoretical implication of this study is the extension of the literature on the role of Sharia compliance in firm performance, confirming that religious adherence can be a determinant of efficiency and value creation to increase performance. However, it does not fully eliminate earnings management practices. The practical implication highlights the necessity for regulators, investors, and corporate managers to strengthen oversight and corporate governance to ensure transparent and accountable accounting practices, regardless of Sharia or non-Sharia status. The novelty of this research lies in its cross-industry scope with a large firm-year observation, providing a comprehensive view of performance and earnings management differences between Sharia and non-Sharia firms, which have been underexplored in previous studies.