Journal of Business Ethics

, Volume 134, Issue 3, pp 369–395 | Cite as

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

  • Fayez A. Elayan
  • Jingyu Li
  • Zhefeng Frank Liu
  • Thomas O. Meyer
  • Sandra Felton
Article

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 

JEL Classification

M14 

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Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Fayez A. Elayan
    • 1
  • Jingyu Li
    • 1
  • Zhefeng Frank Liu
    • 1
  • Thomas O. Meyer
    • 2
  • Sandra Felton
    • 1
  1. 1.Department of Accounting, Goodman School of BusinessBrock UniversitySt. CatharinesCanada
  2. 2.Southeastern Louisiana UniversityHammondUSA

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