Islamic labeled firms: Revisiting Dow Jones measure of compliance
54 Pages Posted: 6 Jan 2019 Last revised: 29 Jun 2020
Date Written: June 27, 2020
Investors hand billions of dollars across 131 countries to Islamic law-compliant funds that are often promoted as more socially responsible, less risky, and less prone to failure. Our empirical results indicate that the Shariah-compliant firms identified by Dow Jones do not have higher CSR scores, lower risk, or lower likelihood of failure than non-compliant firms. We address endogeneity using the instrumental variable (IV) approach and the selection bias using the propensity score matching method. Our results are similar when using Dow Jones, FTSE, and HSBC indices and when using CSR scores provided by multiple databases. We create an index to measure compliance with the 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 compliant with the Islamic law and are 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: Suggested Citation