Income Smoothing and Islam: Evidence from Pakistan Shari'ah Compliant Companies

Journal of Islamic Thought and Civilization, 6 (2), 77-93, Fall 2016

Posted: 6 Aug 2017

See all articles by Afia Mushtaq

Afia Mushtaq

University of Management and Technology (UMT), Pakistan - School of Business and Economics

Sultan Hassan

University of Management and Technology (UMT), Pakistan

Farrukh Ijaz

University of Management and Technology

Date Written: August 2, 2016

Abstract

Income smoothing refers to the use of accounting techniques to level out net income fluctuations from one period to the next. Companies indulge in this practice to manipulate the earnings over the period in order to lower the level of uncertainty. The companies with constant earnings attract more investors as they are willing to pay more prices for company’s stock. This study examines the presence of artificial income smoothing in 64 Shari‘ah compliant companies listed in the financial market of Pakistan for the period 2008-2015. The study also takes into consideration the concept of income smoothing from an Islamic perspective. To achieve the study’s objectives, Eckel’s index model is used. The study found that 34 percent of the companies are non-smoothers and 66 percent of the companies are smoothers in pooled sample. Among high market capitalized 32 companies, 37.5 percent of the companies are non-smoothers and 62.5 percent are smoothing companies. In 32 low market capitalized companies, 31 percent companies are non- smoothing and 69 percent companies are practicing income smoothing.

Keywords: Income smoothing, Shari'ah compliance, Islamic perspective, Pakistan

Suggested Citation

Mushtaq, Afia and Hassan, Sultan and Ijaz, Farrukh, Income Smoothing and Islam: Evidence from Pakistan Shari'ah Compliant Companies (August 2, 2016). Journal of Islamic Thought and Civilization, 6 (2), 77-93, Fall 2016, Available at SSRN: https://ssrn.com/abstract=3012454

Afia Mushtaq

University of Management and Technology (UMT), Pakistan - School of Business and Economics

Johar Town - Phase 1
Lahore, 54000
Pakistan

Sultan Hassan

University of Management and Technology (UMT), Pakistan ( email )

Johar Town - Phase 1
Lahore, Punjab 54770
Pakistan

Farrukh Ijaz (Contact Author)

University of Management and Technology ( email )

C-II
Lahore, Punjab 54770
Pakistan

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