Managerial Opportunism: Monitoring Financial Risk of Malaysian Shariah-compliant Companies

Aziatul Waznah Ghazali; Mohd Taufik Mohd Suffian; Zuraidah Mohd Sanusi; Fahdah Sultan Alsudairi

doi:10.7187/GJATSI2018-07

Authors

Aziatul Waznah Ghazali Kingston Business School, Kingston University London, Kingston Hill Campus, Kingston Hill,
Mohd Taufik Mohd Suffian Faculty of Accountancy & Accounting Research Institute (ARI), Universiti Teknologi MARA, Perak, 40450 Shah Alam, Selangor, Malaysia
Zuraidah Mohd Sanusi Accounting Research Institute (ARI), Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia
Fahdah Sultan Alsudairi Faculty of Economics & Administration, King Abdul Aziz University, 2907 MuhamadiaJeddah, 23623-9073, Saudi Arabia

DOI:

https://doi.org/10.7187/GJATSI2018-07

Keywords:

Managerial opportunism, Real earnings management, Shariah-compliant companies, Financial distress, Free cash flow

Abstract

Managerial opportunism, such as earnings management, is a rampant, but often discreet, among certain managers. Agency theory and the notion of conflict of interest are used as bases to assume that managers would resolve to engage with inappropriate activities for their personal benefits. Distortion of earnings would erode investor confidence and is detrimental to the capital market. The Islamic capital market with Shariah-compliant firms is expected not to engage in activities that go against the religion code of conduct. The main purpose of this study is to investigate managerial opportunism among Shariah-compliant companies, specifically the relationship between real earnings management and the risk of financial distress, leverage, and free cash flow. This study employs 4,115 data from 694 sample companies for five years (2009–2013). Findings conclude that the risk of financial distress, leverage, and free cash flow have a significant relationship with earnings management among Shariah-compliant companies. This study provides evidence that further improvements on corporate governance are necessary to ensure that Shariah-compliant companies adhere with the Shariah requirement.

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