Corporate Governance of Islamic Banks, Earning Management and Firms Value: A Conceptual Framework

https://doi.org/10.35912/josfe.v1i2.3801
Published: Jan 8, 2026

Abstract:

Purpose: This study examines the role of corporate governance in mitigating earnings management and its impact on firm value in Islamic banking institutions, emphasizing the function of Sharia Supervisory Boards within a dual governance framework.

Research Methodology: A quantitative panel data approach is employed using observations from Islamic banks over multiple periods. Corporate governance is proxied by board characteristics, ownership structure, audit committee attributes, and Sharia Supervisory Boards. Earnings management is measured using discretionary accrual-based models, while firm value is captured through market-based valuation indicators. Panel regression techniques are applied to analyze direct and indirect relationships among variables

Results: The results indicate that stronger corporate governance mechanisms are associated with lower levels of earnings management, suggesting effective monitoring of managerial discretion. Earnings management is found to negatively affect firm value, implying that capital markets penalize opportunistic financial reporting. Several governance attributes also demonstrate a direct positive relationship with firm value by enhancing transparency and investor confidence.

Conclusions: The study confirms that robust corporate governance, particularly Sharia-based oversight, plays a vital role in constraining earnings management and improving firm value in Islamic banks, supporting agency and signaling theories.

Limitations: This study relies on accrual-based earnings management measures and secondary governance data, which may not fully capture real activity manipulation

Contribution: This research contributes to Islamic finance literature by empirically clarifying the governance–earnings management–firm value nexus and offers practical insights for regulators and practitioners to strengthen governance frameworks in Islamic banking.

Keywords:
1. Earnings
2. Firms Value
3. Islamic Banks
4. Management
Authors:
Harsono Edwin Puspita
University of Lampung, Lampung, Indonesia
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Vol. 1 No. 2 (2025): July
Articles
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References

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    Albi, R. U., Komalasari, A., & Syaipudin, U. (2025). The Influence of Earnings Quality, Banking Technology, Operational Efficiency, and Non-Performing Loans (NPL) on Firm Value. Jurnal Economic Resource, 8(1), 315-321. doi:https://doi.org/10.57178/jer.v8i1.1339

    Aliyu, S., Yusof, R. M., & Naiimi, N. (2017). The role of moral transaction mode for sustainability of banking business: A proposed conceptual model for Islamic microfinance banks in Nigeria. International Journal of Social Economics, 44(12), 2238-2256. doi:https://doi.org/10.1108/IJSE-07-2016-0205

    Almutairi, A. R., & Quttainah, M. A. (2017). Corporate governance: evidence from Islamic banks. Social Responsibility Journal, 13(3), 601-624. doi:https://doi.org/10.1108/SRJ-05-2016-0061

    An, H., Ran, C., & Gao, Y. (2025). Does ESG information disclosure increase firm value? The mediation role of financing constraints in China. Research in International Business and Finance, 73, 102584. doi:https://doi.org/10.1016/j.ribaf.2024.102584

    Bidabad, B., & Sherafati, M. (2017). Sustainable financing and anti-squandering measures in Rastin banking. International Journal of Law and Management, 59(6), 939-949. doi:https://doi.org/10.51415/10321/3946

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    Lestari, P. A., & Adekunle, A. O. (2024). The Impact of Monetary Policies on Corporate Foreign Exchange Risk Management: A Systematic Literature Review Across Emerging Economies. Sinergi International Journal of Accounting and Taxation, 2(3), 126-139. doi:https://doi.org/10.61194/ijat.v2i3.481

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    Mili, M., & Abid, S. (2017). Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter! International Journal of Islamic and Middle Eastern Finance and Management, 10(1), 42-59. doi:https://doi.org/10.1108/IMEFM-12-2015-0148

    Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), 197-233. doi:https://doi.org/10.1111/1475-679X.12127

    Mujianto, A., & Noviaristanti, S. (2025). Development of strategy formulation with scenario planning approach case study on Zakat House. Dirham: Journal of Sharia Finance and Economics, vol 1 no 1, 1-18. doi:https://doi.org/10.35912/josfe.v1i1.3331

    Nguyen, Q., Kim, M. H., & Ali, S. (2024). Corporate governance and earnings management: Evidence from Vietnamese listed firms. International Review of Economics & Finance, 89, 775-801. doi:https://doi.org/10.1016/j.iref.2023.07.084

    Salehi, M., Tarighi, H., & Rezanezhad, M. (2017). The relationship between board of directors’ structure and company ownership with corporate social responsibility disclosure: Iranian angle. Humanomics, 33(4), 398-418. doi:https://doi.org/10.1108/H-02-2017-0022

    Shafiquea, A., Kashifb, A. R., Haiderc, A., Zaheerd, N., & Khan, S. (2021). Effect of asset utilisation and corporate growth on financial performance. International Journal of Innovation, Creativity and Change, 15(5), 1104-1118. doi:https://doi.org/10.1108/APJBA-08-2017-0077

    Suryanto, S., & Rasmini, M. (2025). Research The Implementation of Basel III on The Financial Performance of The Banking Industry in Indonesia. Jurnal Ilmu Keuangan dan Perbankan (JIKA), 14(2). doi:https://doi.org/10.34010/jika.v14i2.15912

    Suttipun, M. (2018). The influence of corporate governance, and sufficiency economy philosophy disclosure on corporate financial performance: Evidence from Thailand. Asia-Pacific Journal of Business Administration, 10(1), 79-99. doi:https://doi.org/10.1108/APJBA-08-2017-0077

    Thoib, M., & Bibi, T. (2025). A Literature Review on the Role of the Sharia Supervisory Board in Maintaining Sharia Compliance in Islamic Banks. Zabags International Journal of Economy, 3(2), 280-288. doi:https://doi.org/10.61233/zijec.v3i2.117

    Uddin, N., & Barua, P. (2024). Women's economic empowerment and COVID-19 pandemic: A study on women entrepreneurs in Bangladesh. Journal of Economy and Technology, 2, 258-268. doi:https://doi.org/10.1016/j.ject.2024.08.006

    Wiadnyani, D. A. P. M., & Artini, L. G. S. (2023). The Influence of NPL, BOPO, LDR, and ROA on Firm Value: Study of Banking Sub-Sector Companies on the Indonesia Stock Exchange 2019-2021. European Journal of Business and Management Research, 8(4), 261-266. doi:https://doi.org/10.24018/ejbmr.2023.8.4.2062

    Wulandari, S., Sudirja, D., Setiadi, R. M., & Shabrina, H. N. (2025). The Effect of Good Corporate Governance and Firm Characteristics on Firm Value of Sharia and Conventional Banks in Indonesia. Islamiconomic: Jurnal Ekonomi Islam, 16(1), 1-15. doi:https://doi.org/10.32678/ijei.v16i1.831

  1. Al-Nasser Mohammed, S. A. S., & Muhammed, J. (2017). The relationship between agency theory, stakeholder theory and Shariah supervisory board in Islamic banking: An attempt towards discussion. Humanomics, 33(1), 75-83. doi:https://doi.org/10.1108/H-08-2016-0062
  2. Albi, R. U., Komalasari, A., & Syaipudin, U. (2025). The Influence of Earnings Quality, Banking Technology, Operational Efficiency, and Non-Performing Loans (NPL) on Firm Value. Jurnal Economic Resource, 8(1), 315-321. doi:https://doi.org/10.57178/jer.v8i1.1339
  3. Aliyu, S., Yusof, R. M., & Naiimi, N. (2017). The role of moral transaction mode for sustainability of banking business: A proposed conceptual model for Islamic microfinance banks in Nigeria. International Journal of Social Economics, 44(12), 2238-2256. doi:https://doi.org/10.1108/IJSE-07-2016-0205
  4. Almutairi, A. R., & Quttainah, M. A. (2017). Corporate governance: evidence from Islamic banks. Social Responsibility Journal, 13(3), 601-624. doi:https://doi.org/10.1108/SRJ-05-2016-0061
  5. An, H., Ran, C., & Gao, Y. (2025). Does ESG information disclosure increase firm value? The mediation role of financing constraints in China. Research in International Business and Finance, 73, 102584. doi:https://doi.org/10.1016/j.ribaf.2024.102584
  6. Bidabad, B., & Sherafati, M. (2017). Sustainable financing and anti-squandering measures in Rastin banking. International Journal of Law and Management, 59(6), 939-949. doi:https://doi.org/10.51415/10321/3946
  7. Chikwira, C. (2021). Economic role of derivatives on bank lending, firm value and economic growth: evidence of South Africa. Durban University of Technology.
  8. Dao, B. (2020). Determinants of profitability in commercial banks in Vietnam, Malaysia and Thailand. Journal of Asian Finance, Economics and Business, 7(4), 133-143. doi:https://doi.org/10.13106/jafeb.2020.vol7.no4.133
  9. Dao, B. T. T., & Nguyen, K. A. (2020). Bank capital adequacy ratio and bank performance in Vietnam: A simultaneous equations framework. Journal of Asian Finance, Economics and Business, 7(6), 39-46. doi:https://doi.org/10.13106/jafeb.2020.vol7.no6.039
  10. Elhalaby, S., Sarea, A., Alnesafi, A., & Al-Absy, M. S. M. (2023). The adoption of AAOIFI standards by Islamic banks: understanding the microeconomic consequences. Economies, 11(2), 39. doi:https://doi.org/10.3390/economies11020039
  11. Fitriyani, L. N., Handayani, T., & Sari, L. P. (2025). Analysis of the marketing strategy of savings products at BMT Nasuha during the Covid-19 pandemic. Dirham: Journal of Sharia Finance and Economics, vol1 no 1, 1-14. doi:https://doi.org/10.35912/josfe.v1i1.3329
  12. Handayani, D. L., & Azmiyanti, R. (2023). Sosialisasi Dan Pelatihan Pembukuan Keuangan Sederhana Bagi Umkm Di Desa Ambulu, Kabupaten Probolinggo. Jurnal Pengabdian Masyarakat SENSASI, 3(02), 58 - 65. doi:https://doi.org/10.33005/sensasi.v3i02.10
  13. Handayani, E., Rahmawati, A., Tubastuvi, N., & Hapsari, I. (2021). Performance analysis of sharia commercial banks in Indonesia before the covid pandemic period (2015-2019). International Journal of Research in Business and Social Science, 10(2), 228-237. doi:https://doi.org/10.2139/ssrn.3816553
  14. Karianga, A., & Kasingku, F. J. (2022). Can Good Corporate Governance Moderate the Relationship Between Earnings Management and Firm Value? International Journal on Social Science, Economics and Art, 12(3), 167-177. doi:https://doi.org/10.35335/ijosea.v12i3.137
  15. Kurniawan, S., & Fitriyani, F. N. (2023). Thomas Lickona's Idea on Character Education Which Builds Multicultural Awareness: Its Relevance for School/Madrasah in Indonesia. Al-Tadzkiyyah: Jurnal Pendidikan Islam, 14(1), 33-53. doi:https://doi.org/10.24042/atjpi.v14i1.15820
  16. Lestari, P. A., & Adekunle, A. O. (2024). The Impact of Monetary Policies on Corporate Foreign Exchange Risk Management: A Systematic Literature Review Across Emerging Economies. Sinergi International Journal of Accounting and Taxation, 2(3), 126-139. doi:https://doi.org/10.61194/ijat.v2i3.481
  17. Miles, S. J., & Van Clieaf, M. (2017). Strategic fit: Key to growing enterprise value through organizational capital. Business Horizons, 60(1), 55-65. doi:https://doi.org/10.1016/j.bushor.2016.08.008
  18. Mili, M., & Abid, S. (2017). Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter! International Journal of Islamic and Middle Eastern Finance and Management, 10(1), 42-59. doi:https://doi.org/10.1108/IMEFM-12-2015-0148
  19. Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), 197-233. doi:https://doi.org/10.1111/1475-679X.12127
  20. Mujianto, A., & Noviaristanti, S. (2025). Development of strategy formulation with scenario planning approach case study on Zakat House. Dirham: Journal of Sharia Finance and Economics, vol 1 no 1, 1-18. doi:https://doi.org/10.35912/josfe.v1i1.3331
  21. Nguyen, Q., Kim, M. H., & Ali, S. (2024). Corporate governance and earnings management: Evidence from Vietnamese listed firms. International Review of Economics & Finance, 89, 775-801. doi:https://doi.org/10.1016/j.iref.2023.07.084
  22. Salehi, M., Tarighi, H., & Rezanezhad, M. (2017). The relationship between board of directors’ structure and company ownership with corporate social responsibility disclosure: Iranian angle. Humanomics, 33(4), 398-418. doi:https://doi.org/10.1108/H-02-2017-0022
  23. Shafiquea, A., Kashifb, A. R., Haiderc, A., Zaheerd, N., & Khan, S. (2021). Effect of asset utilisation and corporate growth on financial performance. International Journal of Innovation, Creativity and Change, 15(5), 1104-1118. doi:https://doi.org/10.1108/APJBA-08-2017-0077
  24. Suryanto, S., & Rasmini, M. (2025). Research The Implementation of Basel III on The Financial Performance of The Banking Industry in Indonesia. Jurnal Ilmu Keuangan dan Perbankan (JIKA), 14(2). doi:https://doi.org/10.34010/jika.v14i2.15912
  25. Suttipun, M. (2018). The influence of corporate governance, and sufficiency economy philosophy disclosure on corporate financial performance: Evidence from Thailand. Asia-Pacific Journal of Business Administration, 10(1), 79-99. doi:https://doi.org/10.1108/APJBA-08-2017-0077
  26. Thoib, M., & Bibi, T. (2025). A Literature Review on the Role of the Sharia Supervisory Board in Maintaining Sharia Compliance in Islamic Banks. Zabags International Journal of Economy, 3(2), 280-288. doi:https://doi.org/10.61233/zijec.v3i2.117
  27. Uddin, N., & Barua, P. (2024). Women's economic empowerment and COVID-19 pandemic: A study on women entrepreneurs in Bangladesh. Journal of Economy and Technology, 2, 258-268. doi:https://doi.org/10.1016/j.ject.2024.08.006
  28. Wiadnyani, D. A. P. M., & Artini, L. G. S. (2023). The Influence of NPL, BOPO, LDR, and ROA on Firm Value: Study of Banking Sub-Sector Companies on the Indonesia Stock Exchange 2019-2021. European Journal of Business and Management Research, 8(4), 261-266. doi:https://doi.org/10.24018/ejbmr.2023.8.4.2062
  29. Wulandari, S., Sudirja, D., Setiadi, R. M., & Shabrina, H. N. (2025). The Effect of Good Corporate Governance and Firm Characteristics on Firm Value of Sharia and Conventional Banks in Indonesia. Islamiconomic: Jurnal Ekonomi Islam, 16(1), 1-15. doi:https://doi.org/10.32678/ijei.v16i1.831