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.
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AT&T Tops Covalence Ethical Ranking of U.S. Telecoms; Dallas, Texas, Pewaukee, Wisconsin, February 18, 2010. Source: News release.
L'Oreal Recognized As One of The World’s Most Ethical Companies; NEW YORK, March 20, 2014. Source: PR Newswire.
The 12 Least Ethical Companies In The World: Covalence's Ranking (PHOTOS, POLL) Huffington Post, Grace Kiser. First Posted: 03/30/10 06:12 AM ET; Updated: 05/25/11 04:20 PM ET.
The finding of a significant association between the CEQ rankings and share prices would suggest both that the index reflects valuable information about corporate ethics and that this information is important to investors. A finding of no significance could result if either the CEQ is not a good proxy for ethical reputation and/or if shareholder wealth is not impacted by corporate ethics.
One such example is the “Business Ethics Best Citizen” title awarded by Business Week in 2001.
The authors recognize that no single, currently available measure of ethical performance is unquestioned as to what is being captured. In the conclusion section, we address some concerns regarding the CEQ specifically.
For the time period covered by this study, CEQ was based on 45 criteria. By July 2013, this had been expanded to 50 criteria.
By July 2013, the number of firms covered by the CEQ had been increased to 2,800.
We also tried to retain four factors. The eigenvalues, loadings, and variances extracted are similar both before and after rotations using Varimax or Promax.
The number of announcements cited here does not include the 114 quarterly affirmations, i.e., no change in ethical performance.
The authors are deeply indebted to the Editor for his contributions to the ideas expressed in the following three paragraphs.
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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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Elayan, F.A., Li, J., Liu, Z.F. et al. Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting Quality. J Bus Ethics 134, 369–395 (2016). https://doi.org/10.1007/s10551-014-2437-8
- Ethical performance
- Corporate social responsibility