The impact of Islamic accounting standards on information asymmetry: The case of Gulf Cooperation Council (GCC) member countries

Abstract

Purpose

The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry among investors in the Gulf Cooperation Council (GCC) member countries. In addition, the paper investigates whether the influence of IFSB-4 on information asymmetry varies between Islamic and conventional financial institutions.

Design/methodology/approach

The paper tests the hypotheses using a sample of firms listed in the GCC over a period of 2000-2013. Ordinary least square regression and fixed-effects estimation techniques are applied to test the hypotheses.

Findings

The findings reveal that information asymmetry among investors is lower after the implementation of IFSB-4 than before, indicating that the standard has increased transparency. The results also reveal that information asymmetry after the implementation of IFSB-4 is lower for Islamic than for conventional financial institutions. This suggests that IFAB-4 promotes more transparency for Islamic than conventional institutions.

Research limitations/implications

Owing to data availability, we were unable to use other proxies of information asymmetry, e.g. bid-ask spreads, and the level of disclosure, e.g. self-constructed disclosure index.

Practical implications

The paper concludes that disclosures under IFAB-4 reduce information asymmetry among investors. In this context, this study increases the awareness of standard setters academics investors regulators and many other stakeholders about the economic consequences of disclosure standards in the region.

Originality/value

This study takes a first step to fill evident gaps in the literature by investigating the influences of disclosure standard on information asymmetry in a unique setting that is often ignored by accounting researchers, which helps to widen our knowledge on accounting practices across the globe.

Citation

Tessema, A.M., Garas, S. and Tee, K. (2017), "The impact of Islamic accounting standards on information asymmetry: The case of Gulf Cooperation Council (GCC) member countries", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 10 No. 2, pp. 170-185. https://doi.org/10.1108/IMEFM-09-2016-0129