Internal Governance Mechanisms and Information Value of Banks Earnings

Marwa Elnahass*, Muhammad Tahir, Noora Yusuf, Aly Salama

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This study examines the association between internal corporate governance mechanisms (i.e. board of directors and audit committee and the information value of bank earnings. We comparatively assess this association across different bank types, Islamic versus conventional banks. We also investigate the mediating effect of Shariah governance.

We utilise a unique and an international sample of 723 bank-year observations representing 100 listed banks from 16 countries during the period of 2007 to 2015. We investigate the characteristics of the board of directors and audit committee (i.e. size and independence) and employ three core analyses for earnings informativeness (i.e. earnings persistence, cash flow predictability and reliability of loan loss provisions). Additional analyses address Shariah supervisory boards' size, financial expertise, and multiple outside directorships. We use the random-effect GLS estimation technique and provide several robustness checks and sensitivities.

We find that, on average, having large and independent boards (and audit committees) increases the informativeness of reported earnings for banks. Conditional on bank type, our results report strong evidence for differential effects across the two alternative banking systems. In Islamic banks, large and independent board of directors (and audit committees are positively associated with all measures of information value. There is insignificant evidence for conventional banks. However, Shari' ah supervisory boards show no significant effect on the reported earnings' informativeness.

This is the first study, to the best of our knowledge, that empirically and comparatively assesses the information value of reported earnings in association with effective internal governance while recognizing the institutional characteristics of different bank types. We offer new insights to policymakers, investors and other stakeholders located within countries operating on a dual banking system. The results could help regulators to improve their rules/guidance related to double-layer governance and financial reporting quality.
Original languageEnglish
JournalJournal of Accounting in Emerging Economies
Publication statusAccepted/In press - 28 Apr 2023

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