Kerelevenan Maklumat Rizab Penyamaan Keuntungan dalam Syarikat Induk

Perbankan Islam Di Malaysia, Temson Tunick, Norman Mohd Saleh

Research output: Contribution to journalArticle

Abstract

Profit equalization reserve (PER) i.e. a reserve allocated from profit during good times to be used during difficult times, in the Malaysian Islamic financial institutions is an acceptable tool to smoothen earnings. In contrast to prior literature, it is an acceptable practice to smoothen earnings. In Islamic financial institutions, the concept of profit sharing is used in most contracts because interest or riba' is prohibited. When return in the conventional financial institutions which is based on a predetermined rate is high, there is a tendency for the Islamic financial institutions (as Mudharib) to sacrifice their share of profit in order to pay a rate of return equivalent to a competitive rate of return. As such, PER is allowed by the authorities in Islamic financial institutions to make sure they have enough reserves to be used during difficult times, and be able to retain their customer base. Although prior literature found investors discount prices due to earnings management practices, the benefit of competition advantage to the Islamic financial institutions by having PER could reverse or off-set the effect. Thus, there is a question whether investors regard this information as relevant in their decision making. This study examines the relevance of the PER financial information to investors. In addition, this study also investigates the effect of a new guideline on PER imposed by the central bank of Malaysia i.e. Bank Negara Malaysia (BNM) in 2011. The new guideline of PER implementation suggests different treatment of PER provision by investors and PER by Mudharib that affect items in the financial statements and subsequently investors judgment. Using data of listed bank holding companies from 2001 to 2014 i.e. 102 observations, the findings show PER provision is negatively related to share prices. This relationship is stronger after enforcement of the new guideline. Consistent to prior literature, this suggests PER is perceived as a tool to manage earnings. The implication is that the regulator has to give serious attention in the decision either to stop or continue the use of PER provision. Although the objective is good for the bank, it can potentially be misused by the management to manage bank's earnings and return. Following the adoption of new guidelines in 2011, the relationship between PER provided and share prices has been strengthened.

Original languageEnglish
JournalJurnal Pengurusan
Volume55
Publication statusPublished - 1 Jan 2019

Fingerprint

Profit
Equalization
Islamic financial institutions
Investors
Share prices
Malaysia
Rate of return
Profit sharing
Authority
Earnings management
Bank holding companies
Decision making
Central bank
Financial statements
Financial information
Financial institutions
Management practices
Price discount
Enforcement

Keywords

  • Islamic financial institutions
  • Profit equalization reserve
  • Smoothen earnings
  • Value relevance

ASJC Scopus subject areas

  • Business and International Management
  • Accounting
  • Business, Management and Accounting (miscellaneous)

Cite this

Kerelevenan Maklumat Rizab Penyamaan Keuntungan dalam Syarikat Induk. / Di Malaysia, Perbankan Islam; Tunick, Temson; Saleh, Norman Mohd.

In: Jurnal Pengurusan, Vol. 55, 01.01.2019.

Research output: Contribution to journalArticle

Di Malaysia, Perbankan Islam ; Tunick, Temson ; Saleh, Norman Mohd. / Kerelevenan Maklumat Rizab Penyamaan Keuntungan dalam Syarikat Induk. In: Jurnal Pengurusan. 2019 ; Vol. 55.
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