Islamic labeled firms: Revisiting Dow Jones measure of compliance

Elnahas, A., Ismail, G., Elkhatib, R., and Hassan, M., Islamic labeled firms: Revising Dow Jones measure of compliance. Journal of Business Finance and Accounting. Forthcoming

51 Pages Posted: 6 Jan 2019 Last revised: 22 Oct 2020

See all articles by Ahmed Elnahas

Ahmed Elnahas

The University of Texas Rio Grande Valley

Ghada Ismail

University of Texas Rio Grande Valley

Rwan El-Khatib

Zayed University - College of Business

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: June 27, 2020

Abstract

Billions of dollars, across 131 countries, are invested in Islamic law-compliant funds that are often promoted as consistent with the spirit and overall objectives of Islam (Maqasid Al-Sharia), thereby indicating they are more socially responsible, less risky, and less prone to failure. The empirical results of this study indicate that Shariah-compliant firms identified by the Dow Jones do not have higher corporate social responsibility (CSR) scores, lower risk, or lower likelihood of failure than noncompliant firms. We address endogeneity using the instrumental variable (IV) approach and selection bias using propensity score matching. Our results are similar when using the Dow Jones Islamic Market World, the Financial Times Stock Exchange Islamic Index, and the Hongkong and Shanghai Banking Corporation indices and when using CSR scores provided by multiple databases. We create an index to measure compliance with Islamic law that overcomes several flaws in the binary measures currently employed in the industry. This index can help Shariah-compliant funds to fulfill their promise by constructing portfolios that are both compliant with Islamic rulings and consistent with the spirit and objectives of Islam in being more socially responsible, less risky, and less prone to failure.

Keywords: Religiosity; Islamic Finance; Corporate Social Responsibility, Agency Theory, Stakeholder Theory, Insider-Initiated Corporate Philanthropy

JEL Classification: G32, M14, Z12

Suggested Citation

Elnahas, Ahmed and Ismail, Ghada and El-Khatib, Rwan and Hassan, M. Kabir, Islamic labeled firms: Revisiting Dow Jones measure of compliance (June 27, 2020). Elnahas, A., Ismail, G., Elkhatib, R., and Hassan, M., Islamic labeled firms: Revising Dow Jones measure of compliance. Journal of Business Finance and Accounting. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3305430 or http://dx.doi.org/10.2139/ssrn.3305430

Ahmed Elnahas (Contact Author)

The University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
College of Business and Entrep
Edinburg, TX 78539
United States

Ghada Ismail

University of Texas Rio Grande Valley ( email )

TX
United States

Rwan El-Khatib

Zayed University - College of Business ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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