Corporate ethics: evidence from Islamic banks

The purpose of this study is to investigate whether banks’ management behavior is related to corporate ethics. We employ earnings-management and expense-preference measures to evaluate management behavior. Using a very large sample of banks from 15 countries and controlling for a number of bank- and country-level factors, we find that managers in Islamic banks are less likely to engage in unethical business practices compared to those in commercial banks. We also document that Shari’ah supervisory boards embedded in Islamic banks affect and shape managerial behavior and mitigate agency problems. These results establish a link between corporate ethics and management behavior through Shari’ah and Shari’ah supervisory boards.