Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting Quality

Fayez A. Elayan (), Jingyu Li, Zhefeng Frank Liu, Thomas O. Meyer and Sandra Felton
Additional contact information
Fayez A. Elayan: Brock University
Jingyu Li: Brock University
Zhefeng Frank Liu: Brock University
Thomas O. Meyer: Southeastern Louisiana University
Sandra Felton: Brock University

Journal of Business Ethics, 2016, vol. 134, issue 3, No 3, 369-395

Abstract: Abstract We examine the equity valuation effect of press releases of upgrades or downgrades reflected in the Covalence Ethical Quote (CEQ), an index ranking the ethical performance of multinational firms. The index is updated quarterly and is comprehensive enough to include 45 criteria reflecting working conditions, impact of product, impact of production, and company institutional impact. Thus, it captures many dimensions of firms’ ethical performance that are not accounted for in previous research. Our research encompasses a joint test of the value relevance of the index itself and the impact of ethical reputation on a firm’s value. We find first a significant causal relationship between stock market reactions and changes in the CEQ. Specifically, disclosures of positive (negative) changes in firm ethical performance cause increases (decreases) in firm value. Second, cross-sectional analysis indicates a positive association between changes in firm ethical performance and both its financial performance and its financial reporting quality. Collectively, these results suggest that the CEQ conveys information that is useful to investors. Further, corporate measures taken to increase ethical performance are associated with positive benefits to shareholders. Finally, investors have concluded that good news about their firms’ efforts to be ethical is worth the cost.

Keywords: Ethical performance; FRQ; Corporate social responsibility; FP (search for similar items in EconPapers)
JEL-codes: M14 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10551-014-2437-8

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