The Impact of Earnings Management on the Efficiency and Stability of Islamic and Conventional Banks: Evidence from Pakistan

Arafat, Qazi Yasir

doi:10.2478/zireb-2025-0017

Abstract

This study investigates the impact of earnings management (EM) on the efficiency and stability of Islamic and conventional banks in Pakistan. A dataset comprising 6 Islamic and 13 private commercial banks from 2002 to 2022 was analyzed. Efficiency was proxied by return on equity (ROE) and return on assets (ROA), while stability was measured by Z-Scores. EM was represented by discretionary loan loss provisions. Regression models were employed, guided by Breusch-Pagan and Hausman tests. The findings reveal a significant disparity between the effects of EM on the efficiency and stability of Islamic and conventional banks. EM in Islamic banks does not significantly impact efficiency and stability, whereas EM in conventional banks has a negative effect. The study concludes that EM in Islamic banks is not detrimental to stakeholders in terms of efficiency and stability, warranting further research into the factors driving decreasing EM in conventional banks.

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The Impact of Earnings Management on the Efficiency and Stability of Islamic and Conventional Banks: Evidence from Pakistan

Abstract

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