Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting Quality
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.
KeywordsEthical performance FRQ Corporate social responsibility FP
The authors would like to thank participants at the 2014 CAAA conference for helpful comments. We also appreciate helpful suggestions from the ASAC 2014 conference participants and thank them for choosing our research to be the Best Paper Award winner in accounting. We also thank the anonymous referee and the section Editor, Markus Milne for their valuable comments and suggestions. Finally, the authors acknowledge that partial funding for this project has been provided by the Institute for International Issues in Accounting (IIIA).
- Bakan, J. (2004). The corporation—The pathological pursuit of profit and power. New York: Simon & Schuster.Google Scholar
- Beavers, A. S., Lounsbury, J. W., Richards, J. K., Huck, S. W., Skolits, G. J., & Esquivel, S. L. (2013). Practical considerations for using exploratory factor analysis in educational research. Practical Assessment, Research & Evaluation, 18(6), 1–13.Google Scholar
- Chatterji, A. K., & Toffel, M. W. (2010). How firms respond to being rated. Strategic Management Journal, 31, 917–945.Google Scholar
- Cohen, J. R., Krishnamoorthy, G., & Wright, A. (2004). The corporate governance mosaic and financial reporting quality. Journal of Accounting Literature, 23, 87–152.Google Scholar
- Costello, A. B., & Osborne, J. W. (2005). Best practices in exploratory factor analysis: Four recommendations for getting the most from your analysis. Practical Assessment. Research & Evaluation, 10, 1–9.Google Scholar
- Entine, J. (2003). The myth of social investing: A critique of its practice and consequences for corporate social performance research. Organization & Environment, 20(10), 1–17.Google Scholar
- Field, A., Miles, J., & Field, Z. (2012). Discovering Statistics Using R. Thousand Oaks, CA: Sage.Google Scholar
- Fischer, K., & Khoury, N. (2009). The impact of ethical rating on Canadian security performance: Portfolio management and corporate governance implications. http://www.ssrn.com.
- Francis, B., Hasan, I., Park, J. C., & Wu, Q. (2009). Gender differences in financial reporting decision-making: Evidence from accounting conservatism. SSRN 1471059. www.papers.ssrn.com.
- Geczy, C., Stambaugh, R. F., & Levin, D. (2005). Investing in socially responsible mutual funds. Working Paper. SSRN. http://ssrn.com/abstract=416380.
- Gond, J.-P., & Crane, A. (2010). Corporate social performance disoriented: Saving the lost paradigm. Business & Strategy, 49(4), 677–703.Google Scholar
- Hawken, P. (2004). Socially responsible investing: How the SRI industry has failed to respond to people who want to invest with conscience and what can be done to change it. Sausalito: Natural Capital Institute.Google Scholar
- Kieso, D., Weygandt, J., Warfield, T., Young, N., Wiecek, I., & McConomy, B. (2013). Intermediate accounting (10th Canadian ed.). Toronto: Wiley.Google Scholar
- Lyon, J., & Maher, M. (2004, April). The importance of business risk in setting audit fees: Evidence from cases of client misconduct. Working Paper.Google Scholar
- Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2007). Does it pay to be good? A meta-analysis and redirection of research on the relationship between corporate social and FP. Working Paper, Ann Arbor. www.stakeholder.bu.edu.
- Milne, M. J. (2013). Phantasmagoria, sustain-a-babbling in social and environmental reporting. In J. L. Davison & R. Craig (Eds.), The Routledge companion to accounting communication (Chap. 9, pp. 135–153). London: Routledge.Google Scholar
- Pett, M., Lackey, N., & Sullivan, J. (2003). Making sense of factor analysis. Thousand Oaks, CA: Sage.Google Scholar
- Poynder, J. (1844). Literary extracts (Vol. 1). London: J. Hatchard.Google Scholar
- Salewski, M., & Zülch, H. (2012). The impact of corporate social responsibility (CSR) on FRQ evidence from european blue chips. Working Paper, Leipzig Graduate School of Management.Google Scholar
- Scherer, A. G., & Palazzo, G. (2008b). Globalization and corporate social responsibility. In A. Crane, A. McWilliams, D. Matten, J. Moon, & D. S. Siegel (Eds.), The Oxford handbook of corporate social responsibility (pp. 413–431). Oxford: Oxford University Press.Google Scholar
- Scott, R. W. (2012). Financial accounting theory (4th ed.). Canada: Pearson.Google Scholar
- Tabachnick, B. G., & Fidell, L. S. (2001). Using multivariate statistics (4th ed.). Boston: Allyn and Bacon.Google Scholar
- Webley, S., & Hamilton, K. (2004). How does business ethics pay? In The ISBEE conference, Melbourne, Australia, Institute of business ethics, London.Google Scholar