Impact of Islamic Label on Firm’s Governance: Evidence from Pakistan

Abstract

This paper aims to study the impact of Islamic Label on the firm’s governance quality. The recent literature indicates that debt can discipline managers to work efficiently in the interest of the firm. Thus low leverage can proxy for good governance. Since Islamic firms are low on debt, thus we may extend that Islamic label can proxy for good governance. To test our hypothesis, we obtained data from 231 nonfinancial firms listed on Pakistan stock exchange out of which 53 were declared as sharia-compliant. The results indicate that the Islamic label has a positive significant impact on a firm’s governance quality and Islamic label can proxy for good governance. This study aims to form a nexus between Islamic label, leverage, and governance on which there is little or no literature. It will also be important for investors and managers of Islamic funds who have little or no research support about the governance aspect of Islamic firms.