Integrating Values into Governance: The Mediating Role of Earnings Management between Islamic and Corporate Values and Good Corporate Governance in an Emerging Market

Abstract

This study investigates the influence of deep-seated value systems, specifically Islamic values and corporate values, on the implementation of Good Corporate Governance (GCG). Furthermore, it examines the critical mediating role of earnings management in the relationship between these values and GCG within a large, family owned conglomerate in an emerging economy. The study was conducted using a quantitative, explanatory approach. Data were collected via a structured survey from 132 managers across various business units of the Kalla Group in Indonesia. The proposed theoretical framework was analyzed using Structural Equation Modeling (SEM) to test the hypothesized direct and indirect relationships between the variables. The results reveal that both Islamic values and corporate values have a significant positive and direct effect on Good Corporate Governance. The study also finds a significant negative relationship between these values and earnings management, indicating that stronger value systems deter opportunistic financial reporting. Crucially, earnings management was found to partially mediate the relationship between both Islamic and corporate values and GCG. The model fit indices (RMSEA = .000, GFI = .936, CFI = 1.000) indicate an excellent fit to the data. The findings provide compelling evidence for business leaders and policymakers that embedding religious and organizational values into the corporate fabric is not merely a cultural exercise but a strategic imperative that strengthens governance and curtails unethical financial practices. For conglomerates in emerging markets, fostering a value-based culture can be a powerful mechanism for building stakeholder trust and ensuring long-term sustainability. This study contributes a unique perspective to the governance literature by empirically testing a model that integrates religious values (Islam), organizational values (corporate value), and financial reporting ethics (earnings management) as antecedents to GCG. By focusing on a non-Western, faith-influenced corporate environment, it provides a crucial extension to governance theories predominantly developed in Western contexts.