An empirical investigation into the impact ofShari’ah-compliant status and Muslim directorship on the accuracy of IPO management earnings forecasts

Purpose - Islam stresses on the practice of transparency and sufficient disclosure particularly when it concerns the ethical identity of Islamic institutions. This is to make sure that the activities conducted in business adhere toShari’ahprinciples. The purpose of this paper is to examine the impact ofShari’ah-compliant status on the accuracy of initial public offering (IPO) earnings forecasts and to investigate the effect of the existence of Muslim directors on IPO companies’ board of directors on the accuracy of earnings forecasts. Design/methodology/approach - This study makes use of absolute forecast error as a proxy for earnings forecast accuracy. As obtained from the list ofShari’ah-compliant securities established by theShari’ahAdvisory Council of the Malaysian Securities Commission, the study sample comprised 190Shari’ah-compliant and non-compliant IPOs. The collected data were analyzed through univariate analysis and ordinary least squares regression. Findings - The initial findings show that during the study period, the earnings forecasts of Malaysian IPOs are accurate to some level, although such level is still unsatisfactory. The findings also showed thatShari’ah-compliant status and Muslim directorship do not positively affect the accuracy of IPO earnings forecasts. Practical implications - The findings of the study provide some implications for regulators, financial analysts, investors and users of financial statements, particularly those desirous of investing in Islamic capital market. Originality/value - The present study provides a new and far-reaching contribution into the debate about the earnings forecasts disclosure in the context of Islamic ethical perspective. In addition, this study is considered as the first study to extend IPO literature by examining the impact ofShari’ah-compliant status and Muslim directorship on the accuracy of management earnings forecasts disclosed in the IPO prospectus.