Influence of Financial Reporting Quality on Stock Price Crash Risk and the Moderating Role of Shariah Compliance in Malaysia

Geh, Chu Yen (2026) Influence of Financial Reporting Quality on Stock Price Crash Risk and the Moderating Role of Shariah Compliance in Malaysia. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

The stock market serves as a vital engine for economic expansion by facilitating capital allocation and investment. However, it remains susceptible to systemic shocks and sudden downturns. One of the most significant threats to market stability is stock price crash risk (SPCR), which refers to the abrupt and substantial decline in a firm's stock price typically caused by managers withholding negative information. This study investigates the relationship between financial reporting quality (FRQ) and SPCR as well as the moderating role of Shariah compliance on this relationship. This research is based on a randomly chosen sample of 100 non-financial firms listed on the Main Market of Bursa Malaysia from 2014 to 2024. The empirical findings reveal no statistically significant relationship between FRQ and SPCR, indicating that formal reporting standards are insufficient to deter managerial bad news hoarding. However, the results also demonstrate that Shariah compliance significantly moderates the relationship between FRQ and SPCR, albeit with contrasting outcomes across different proxies for FRQ. Specifically, for Shariah-compliant firms, higher quality financial reporting as measured by abnormal accruals effectively reduces SPCR, suggesting that Islamic governance frameworks can reinforce the disciplinary role of financial reporting. Conversely, when using accrual quality as the proxy for FRQ, high-quality financial reporting increases SPCR due to heightened investor sensitivity and rapid market reactions to disclosed information. Several critical implications can be drawn from this study. First, the results offer valuable insights to policymakers on the need to refine financial reporting standards and disclosure requirements as well as to move beyond quantitative financial thresholds and strengthen the monitoring processes for Shariah-compliant firms to ensure adherence to ethical standards. Moreover, the findings may assist public listed firms to better comprehend the importance of embracing ethical governance rooted in religious principles and ensuring rigorous internal monitoring and control to effectively reduce vulnerability to severe market downturns. Lastly, this research may provide investors with a clearer understanding of the need to improve their investment strategies and adopt more sophisticated risk assessment models in their investment decision-making.