The Adoption of AAOIFI Standards by Islamic Banks: Understanding the Microeconomic Consequences

Sherif Elhalaby (), Adel Sarea (), Awwad Alnesafi and Mujeeb Saif Mohsen Al-Absy
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Sherif Elhalaby: Department of Accounting, Faculty of Management Sciences, MSA University, Cairo 12451, Egypt
Adel Sarea: Department of Accounting, Finance & Banking, College of Business and Finance, Ahlia University, Manama 10878, Bahrain
Awwad Alnesafi: Department of Accounting, College of Business Administration, Al Yamamah University, Riyadh 11512, Saudi Arabia
Mujeeb Saif Mohsen Al-Absy: Department of Accounting & Financial Science, College of Administrative & Financial Science, Gulf University, Sanad 26489, Bahrain

Economies, 2023, vol. 11, issue 2, 1-22

Abstract: This study seeks to measure the microeconomic consequences of the adoption of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) standards on the conservatism, financial performance (FP), and earnings management (EM) of Islamic banks (IBs). The study draws on data from 122 IBs across 22 countries over a period of eight years (2014–2021), using the generalised method of moments (GMM). The results indicate a positive impact of AAOIFI adoption on financial performance and conservatism compared to non-adopters. Our results further show that IBs that adopt AAOIFI are less involved in EM. After applying robustness checks (corporate governance, inflation, and mandatory adoption of AAOIFI in some countries), our results remain the same. The implications of the study are potentially valuable for those setting accounting standards (such as AAOIFI and International Accounting Standards Board (IASB)), central banks, financial market regulators, investors, governments, and any adopting or non-adopting Islamic financial institutions (IFIs) through identification of the effects of AAOIFI adoption.

Keywords: AAOIFI; conservatism; earnings management; financial performance; IBs (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2023
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