Abstract:
This study seeks to measure the microeconomic consequences of the adoption of the
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) standards on the
conservatism, financial performance (FP), and earnings management (EM) of Islamic banks (IBs).
The study draws on data from 122 IBs across 22 countries over a period of eight years (2014–2021),
using the generalised method of moments (GMM). The results indicate a positive impact of AAOIFI
adoption on financial performance and conservatism compared to non-adopters. Our results further
show that IBs that adopt AAOIFI are less involved in EM. After applying robustness checks (corporate
governance, inflation, and mandatory adoption of AAOIFI in some countries), our results remain the
same. The implications of the study are potentially valuable for those setting accounting standards
(such as AAOIFI and International Accounting Standards Board (IASB)), central banks, financial
market regulators, investors, governments, and any adopting or non-adopting Islamic financial
institutions (IFIs) through identification of the effects of AAOIFI adoption.
