Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality

Posted: 15 Aug 2016

See all articles by Abdullah Alsaadi

Abdullah Alsaadi

Umm Al-Qura University - College of Business

Aziz Jaafar

Bangor Business School

Muhammed Shahid Ebrahim

Durham Business School

Date Written: August 12, 2016

Abstract

This study examines the effect of two potential sources of ethical principles on earnings quality: corporate social responsibility (CSR) and membership in a Shariah index. We define membership in a Shariah index as the adherence to an ethical code that relates to Islam. Our sample comprises firms in ten European Union countries for the period from 2003 to 2013. The empirical results show that firms with a high degree of CSR are less likely to manage earnings. In contrast, membership in a Shariah index leads to earnings manipulation. Our results are robust after using several alternative quality metrics for earnings. Furthermore, our empirical results indicate that highly rated CSR firms that are not Shariah-compliant are less likely to engage in earnings manipulation. Further, institutional factors are also important in determining the link between CSR, Shariah-compliance, and the quality of financial reporting.

Keywords: Corporate social responsibility, Shariah-compliant investments, Earnings quality

JEL Classification: G30, M14, M41

Suggested Citation

Alsaadi, Abdullah and Jaafar, Aziz and Ebrahim, Muhammed Shahid, Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality (August 12, 2016). Journal of Financial Services Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2822478

Abdullah Alsaadi (Contact Author)

Umm Al-Qura University - College of Business ( email )

Makkah Al-Mukarramah, 21955
Saudi Arabia

Aziz Jaafar

Bangor Business School ( email )

University of Wales
Bangor, LL57 2DG
United Kingdom

Muhammed Shahid Ebrahim

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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