Islamic ethical values of corporate top leadership and real earnings management

Purpose This paper aims to study the roles of Muslim CEO, Muslim Chairman and Muslim board of directors in mitigating earnings management via real activities manipulation. Design/methodology/approach In total, 656 firm year-observations from 2007 to 2014 of Malaysian Top 100 firms listed on Bursa Malaysia is used to examine the relationship between real earnings management (REM) and the religious ethical values of Muslim top leadership of the firms. Findings The study provides evidence that there was no significant relationship between ethical values and REM measures among Muslim top corporate leaders. However, through additional analysis on sub-sample firms, this study finds that Muslim CEO and Muslim Chairman have a significant and negative association with proxies of REM: RCFO and RPC. Research limitations/implications The results show that Muslim CEO and Muslim Chairman are the actors that contribute more control in limiting REM especially in family-owned firms in Malaysia. Originality/value This is the first published paper that focuses on Islamic ethical values of corporate top leadership and REM in Malaysia, as previous studies have focused more on accruals earnings management.