Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

Corporate Governance, Earnings Quality and Market Response: Comparison of Islamic and Non-islamic Stock in the Indonesian Capital Market

Author(s): Muhammad Syafii Antonio, Sugiyarti Fatma Laela, Rafi Rahmad Darmawan

We analyze the role of earnings quality in mediating the relationship between corporate governance and market response. We also observe the relative impact of earnings quality of Islamic and non-Islamic stocks on market response, using 138 firm-years of data from listed companies registered in the Indonesian Institute of Corporate Governance Award from 2008 to 2016. To test the mediating role of earnings quality, we use path analysis, and we use moderated regression analysis to examine the impact of earnings quality on the market for both Islamic and non-Islamic stock. The results show that corporate governance does not directly have a significant impact on market response. However, corporate governance indirectly has a significant influence on market response mediated by earnings quality. The evidence also demonstrates that the better the quality of corporate governance, the better the quality of earnings. The lower the quality of earnings as indicated by the high accrual values, the higher the value of Tobins’ Q as a proxy of market response. These findings suggest the existence of an accrual anomaly in the Indonesian capital market. Finally, this study finds evidence of a higher positive market response to the earnings quality of Islamic stocks than of non-Islamic stocks.