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. ElayanEmail author
  • Jingyu Li
  • Zhefeng Frank Liu
  • Thomas O. Meyer
  • Sandra Felton


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.


Ethical performance FRQ Corporate social responsibility FP 

JEL Classification




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).


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Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  • Fayez A. Elayan
    • 1
    Email author
  • 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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