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

30 10 2014

Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting QualityWe 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. (…) 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.

Source: Journal of Business Ethics, October 2014, Fayez A. Elayan, Jingyu Li, Zhefeng Frank Liu, Thomas O. Meyer, Sandra Felton


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