Assistant Professor COMSATS Institute of IT, Wah Pakistan The Impact of Islamic Governance Mechanisms on Corporate Governance Compliance and Disclosure Dr. Muhammad Yar Khan Assistant Professor COMSATS Institute of IT, Wah Pakistan Dr. Tahira Awan Assistant Professor International Islamic University Islamabad, Pakistan Naima Saleem Lecturer, COMSATS Institue of IT, Wah Pakistan Anam Javeed PhD Scholar, Universiti Utara Malaysia 1

Introduction ‘Shariah’ is providing comprehensive guidance for practicing Muslims in every aspect of day-to-day life (Abu-Tapanjeh, 2009; Kamla, 2009). Consequently, trade, commerce, business and financial transactions are expected to generally reflect Islamic principles. The main objective of this paper is to examine the extent to which corporate commitment to incorporate Islamic values in their operations, as well as conventional ownership structure and CG mechanisms influence the level of information that Pakistani listed firms disclose on their CG practices. 2

Literature Review Empirical studies that examine the extent to which Islamic values are incorporated into business operations and voluntary disclosure of CG practices are rare, and thus provide opportunities to contribute to the literature. Albassam et al. (2017) finds a positive relationship between Islamic Values and CG disclosure in Saudi firms. Using 15 Islamic banks in Bahrain from 2004 to 2007, Vinnicombe (2010) measures the level of compliance with accounting and governance standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). She reports that compliance with AAOIFI’s disclosure guidelines regarding SSBs and ‘murabahah’ contracts are high, but low with respect to AAOIFI’s disclosure requirements on the ‘zakah’ and ‘mudarabah’ contracts. 2

Methodology The PCGI is made by utilizing different 70 CG provisions. The areas covered are (i) the board of directors (BOD); (ii) internal auditing and committees (IAC); (iii) shareholders right (SHR); (iv) transparency and disclosure (TAD); and (v) Internal Control, External Auditor and Risk Management (ICRM). Islamic Governance Index (IGI) containing 10 Islamic business and money related provisions. 2

Methodology Data is collected on ownership structure, including Block Ownership (BOWN), government ownership (GOWN), and institutional proprietorship (IOWN) besides, board/CG properties, including size of the board (BSIZ) and audit firm size (ASIZ). Control Factors: These consolidate risk (Beta), return on assets (ROA), sales growth(SGRO), Leverage (LEV), firm size (FSIZ), capital expenditure (CXP), dividend payment status (DPS), industry Dummy (IDM), and year Dummy (YDM). 2

Descriptive Statistics Table 1: Summary of descriptive statistics   All 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Level of compliance with Islamic Governance Index Mean 28.11 23.62 24.55 26.77 27.66 30.60 30.76 32.13 34.33 33.55 34.40 25.57 Median 26.55 23.65 22.37 22.38 26.62 26.61 30.88 27.78 28.33 23.45 STD 12.87 7.65 9.54 12.98 13.37 14.25 11.30 12.22 12.32 23.55 13.65 14.66 Min 9.11 9.12 14.55 17.26 17.25 17.24 17.00 15.66 16.45 Max 85.33 55.44 64.66 80.81 85.44 80.23 86.34 81.22 82.34 84.55 87.88 2

Descriptive Statistics Table 2: Summary of descriptive statistics Statistics of Determinant of level of compliance with PCGI   Y2004 Y2005 Y2006 Y2007 Y2008 Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 ALL Mean 20.56 23.76 31.17 40.31 47.66 53.88 67.50 73.60 77.57 83.88 85.16 55.00 Median 15.00 19.38 29.38 41.88 50.63 58.75 78.75 86.88 90.94 94.38 95.00 60.60 Maximum 65.63 74.38 79.38 80.63 82.50 88.75 93.75 96.88 98.75 99.38 82.61 Minimum 1.25 0.63 1.88 3.13 3.75 5.00 5.63 7.50 9.38 4.43 Std. Dev. 15.37 15.13 15.46 17.25 18.82 19.69 24.20 25.99 26.37 20.95 19.72 18.03 Observations 70.00

Descriptive Statistics (Explanatory Variables) Table 3: Descriptive statistics for explanatory variables Variables Mean Median STD Min Max ASIZ% 55.90 99.90 51.52 0.00 100.00 BOWN% 32.89 29.11 24.11 5.00 84.22 BSIZ 8.42 8.10 1.61 11.00 CGCO% 9.90 30.32 GOWN% 13.96 2.15 22.05 84.66 IOWN% 5.58 9.95 40.11 Control Variables   CXP% 59.22 0.74 155.44 82.31 DPS% 62.12 47.00 0.01 FSIZ 13.02 14.97 2.66 9.43 18.96 LEV% 23.44 8.33 26.90 85.00 BETA 2.69 1.12 2.86 14.94 ROA% 7.54 4.57 7.67 -7.99 26.74 SGRO% 14.55 9.33 34.54 -45.16 140.00 2

OLS and Multivariate Analysis Table 3: The Impact of Islamic Governance on CG disclosure PCGI- main index BOD sub-index IAC sub-index SHR sub index TAD sub-index Indep V Co-eff p-values P-values Co-Eff   IGI 0.188 0.000⃰ ⃰ ⃰ 0.139 0.0 ⃰ ⃰ ⃰ 0.094 0.03 ⃰ ⃰ 0.228 0.000 ⃰ ⃰ ⃰ 0.128 0.0 ⃰ ⃰ ⃰ BOWN -0.117 0.022 ⃰ ⃰ -0.111 0.04 ⃰ ⃰ -0.106 0.055 ⃰ -0.112 0.723 -0.133 0.044 ⃰ ⃰ GOWN 0.166 0.0 ⃰ ⃰ ⃰ 0.144 0.119 0.01 ⃰ ⃰ ⃰ 0.145 0.00 ⃰ ⃰ ⃰ IOWN 0.225 0.027 0.554 0.075 0.045 ⃰ 0.066 0.066 ⃰ 0.105 0.040 ⃰ ⃰   BSIZ 0.122 0.01 ⃰ ⃰ 0.114 0.087 ⃰ 0.01 0.779 0.111 0.02 ⃰ ⃰ 0.123 ASIZ 0.233 0.0 ⃰ ⃰ ⃰ 0.228 0.12 0.223 0.021 0.693 CGCO 0.266 0.00 ⃰ ⃰ ⃰ 0.188 0.15 0.244 2

OLS and Multivariate Analysis Control variables: firm level characteristics   CXP -0.044 0.188 -0.033 0.299 -0.072 0.066 ⃰ -0.022 0.277 0.195 DPS 0.245 0.000 ⃰ ⃰ ⃰ 0.134 0.122 0.225 0.135 0.000 ⃰ ⃰ ⃰ FSIZ 0.387 0.266 0.244 0.238 0.355 RISK -0.116 0.045 ⃰ ⃰ -0.095 0.055 ⃰ -0.087 0.077 ⃰ -0.077 0.099 ⃰ -0.089 LEV 0.177 0.166 0.254 0.156 ROA -0.028 0.643 -0.012 0.799 -0.006 0.833 -0.004 0.877 -0.007 SGRO 0.255 -0.026 -0.032 0.332 -0.024 0.442 0.334 2

OLS and Multivariate Analysis Industry dummies Included   Year dummies Constant -0.699 0.00 -0.577 -0.466 -0.430 0.000 -0.166 Durbin-Watson statistics 1.952 1.744 1.688 1.655 1.766 F-value 16.822 14.699 13.888 12.882 15.399 Adjusted R squared 0.499 0.455 0.466 0.430 0.477 No of observations 1760 2

Robustness Analysis Weighted PCGI Fixed effects Independent variable Co-eff p-values Islamic values disclosure index   IGI 0.122 0.000⃰ ⃰ ⃰ 0.239 0.000 ⃰ ⃰ ⃰ Control variables: ownership structure variables BOWN -0.087 0.060 ⃰ -0.088 0.055 ⃰ GOWN 0.157 0.167 0.000 ⃰ ⃰ ⃰ IOWN 0.225 0.035 ⃰ ⃰ 0.133 0.028 ⃰ Control variables: corporate governance variables BSIZ 0.137 0.143 ASIZ 0.220 0.238 CGCO 0.188 0.198 0.000 ⃰ ⃰ ⃰ 2

Robustness Analysis Control variables: firm level characteristics CXP   CXP -0.044 0.188 -0.033 0.070 ⃰ DPS 0.245 0.000 ⃰ ⃰ ⃰ 0.218 FSIZ 0.255 0.266 BETA -0.134 0.045 ⃰ ⃰ -0.133 LEV 0.163 0.168 ROA -0.013 0.680 -0.008 0.711 SGRO -0.006 0.775 -0.022 0.734 Industry dummies Included Year dummies Firm dummies Excluded Constant -0.877 -0.933 Durbin-Watson statistics 1.880 1.867 F-value 14.77 ⃰ ⃰ ⃰ 18.699 ⃰ ⃰ ⃰ Adjusted R squared 0.577 0.699 No of observations 1760 2

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