1 Introduction
2 Theory and hypotheses development
2.1 Corporate social responsibility and earnings quality
-
Hypothesis 1a: Engagement in CSR is positively associated with the degree of earnings quality.
-
Hypothesis 1b: Engagement in CSR is negatively associated with the degree of earnings quality.
2.2 Membership in a Shariah index and earnings quality
-
Hypothesis 2a: Membership in a Shariah index is positively associated with the degree of earnings quality.
-
Hypothesis 2b: Membership in a Shariah index is negatively associated with the degree of earnings quality.
3 Research design
3.1 The data
CSR firms (full sample) | CSR Shariah-compliant firms | CSR Non-Shariah-compliant firms | ||||
---|---|---|---|---|---|---|
N
| % |
N
| % |
N
| % | |
Panel A: Country of Domicile | ||||||
Belgium | 144 | 3.01 | 51 | 3.60 | 93 | 2.77 |
Denmark | 179 | 3.74 | 59 | 4.16 | 120 | 3.57 |
Finland | 229 | 4.79 | 93 | 6.56 | 136 | 4.04 |
France | 587 | 12.28 | 270 | 19.04 | 317 | 9.43 |
Germany | 531 | 11.11 | 220 | 15.51 | 311 | 9.25 |
Italy | 266 | 5.56 | 74 | 5.22 | 192 | 5.71 |
Netherlands | 222 | 4.64 | 79 | 5.57 | 143 | 4.25 |
Spain | 284 | 5.94 | 56 | 3.95 | 228 | 6.78 |
Sweden | 250 | 5.23 | 92 | 6.49 | 158 | 4.70 |
United Kingdom | 2089 | 43.69 | 424 | 29.90 | 1665 | 49.51 |
Total | 4781 | 100.00 | 1418 | 100.00 | 3363 | 100.00 |
Panel B: Sector of Operations | ||||||
Oil and gas | 332 | 6.94 | 145 | 10.23 | 187 | 5.56 |
Basic materials | 424 | 8.87 | 261 | 18.41 | 163 | 4.85 |
Industrials | 1396 | 29.20 | 332 | 23.41 | 1064 | 31.64 |
Consumer goods | 652 | 13.64 | 156 | 11.00 | 496 | 14.75 |
Health care | 294 | 6.15 | 108 | 7.62 | 186 | 5.53 |
Consumer services | 1042 | 21.79 | 186 | 13.12 | 856 | 25.45 |
Telecommunications | 138 | 2.89 | 49 | 3.46 | 89 | 2.65 |
Utilities | 256 | 5.35 | 92 | 6.49 | 164 | 4.88 |
Technology | 247 | 5.17 | 89 | 6.28 | 158 | 4.70 |
Total | 4781 | 100.00 | 1418 | 100.00 | 3363 | 100.00 |
3.2 Measuring earnings quality
3.3 Empirical models
4 Main results
4.1 Descriptive statistics
Panel A: Continuous variables of the full sample | ||||||||
Variable |
N
| Mean | Median | SD | Min | Max | 25th Percentile | 75th Percentile |
EQ1
| 4781 | 0.106 | 0.055 | 0.146 | 0.000 | 0.991 | 0.019 | 0.127 |
EQ1+
| 2569 | 0.106 | 0.051 | 0.157 | 0.000 | 0.991 | 0.015 | 0.123 |
EQ1-
| 2212 | -0.105 | -0.059 | 0.132 | -0.929 | 0.000 | -0.131 | -0.024 |
CSR
| 4781 | 0.679 | 0.756 | 0.246 | 0.000 | 0.978 | 0.506 | 0.895 |
CG
| 4781 | 0.591 | 0.642 | 0.253 | 0.000 | 0.973 | 0.403 | 0.803 |
SIZE
| 4781 | 15.246 | 15.161 | 1.421 | 9.585 | 19.375 | 14.269 | 16.123 |
MB
| 4781 | 3.190 | 2.152 | 23.004 | -390.814 | 1080.450 | 1.302 | 3.528 |
ROA
| 4781 | 0.056 | 0.050 | 0.097 | -1.323 | 2.259 | 0.024 | 0.085 |
LEV
| 4781 | 0.254 | 0.238 | 0.174 | 0.000 | 2.280 | 0.136 | 0.355 |
CLOSE
| 4781 | 0.261 | 0.209 | 0.230 | 0.000 | 1.000 | 0.054 | 0.431 |
Panel B: Dichotomous variables of the full sample | ||||||||
Variable | Frequency of 1’s | % | Frequency of 0’s | % | ||||
Auditors
| 4474 | 93.58 | 307 | 6.42 | ||||
Shariah
| 1418 | 29.66 | 3363 | 70.34 | ||||
Panel C: CSR Shariah-compliant versus CSR non-Shariah-compliant firms | ||||||||
CSR Shariah-compliant firms | CSR non-Shariah-compliant firms | |||||||
Variable |
N
| Mean | Median | SD |
N
| Mean | Median | SD |
EQ1
| 1418 | 0.014 | 0.000 | 0.201 | 3363 | 0.006 | 0.000 | 0.170 |
EQ1+
| 1418 | 0.119 | 0.059 | 0.163 | 3363 | 0.100 | 0.053 | 0.137 |
EQ1-
| 748 | 0.126 | 0.056 | 0.178 | 1821 | 0.098 | 0.048 | 0.146 |
CSR
| 670 | -0.110 | -0.062 | 0.145 | 1542 | -0.103 | -0.058 | 0.126 |
CG
| 1418 | 0.788 | 0.858 | 0.184 | 3363 | 0.633 | 0.684 | 0.255 |
SIZE
| 1418 | 0.613 | 0.667 | 0.253 | 3363 | 0.581 | 0.632 | 0.252 |
MB
| 1418 | 16.127 | 15.896 | 1.200 | 3363 | 14.874 | 14.728 | 1.342 |
ROA
| 1418 | 2.723 | 2.133 | 2.697 | 3363 | 3.387 | 2.174 | 27.371 |
LEV
| 1418 | 0.062 | 0.054 | 0.079 | 3363 | 0.053 | 0.048 | 0.103 |
CLOSE
| 1418 | 0.209 | 0.211 | 0.109 | 3363 | 0.273 | 0.257 | 0.192 |
Panel D: Dichotomous variables: CSR Shariah-compliant versus CSR non-Shariah-compliant firms | ||||||||
CSR Shariah-compliant firms | CSR non-Shariah-compliant firms | |||||||
Variable | 1’s | 0’s | 1’s | 0’s | ||||
% | % | % | % | |||||
Auditors
| 1,341 | 77 | 3,133 | 230 | ||||
94.57 | 5.43 | 93.16 | 6.84 |
EQ1
|
CSR
|
Shariah
|
CG
|
SIZE
|
MB
|
ROA
|
LEV
|
CLOSE
|
Auditors
| |
---|---|---|---|---|---|---|---|---|---|---|
EQ1
| 1 | |||||||||
CSR
| -0.0467***
| 1 | ||||||||
Shariah
| 0.0575***
| 0.2877***
| 1 | |||||||
CG
| -0.0161 | 0.3784***
| 0.0566***
| 1 | ||||||
SIZE
| 0.0466***
| 0.5033***
| 0.4025***
| 0.1091***
| 1 | |||||
MB
| 0.0177 | -0.0368**
| -0.0132 | -0.0355**
| 0.0100 | 1 | ||||
ROA
| 0.0971***
| -0.0669***
| 0.0381***
| 0.0005 | 0.1408***
| 0.1805***
| 1 | |||
LEV
| -0.0233 | 0.0494***
| -0.1690***
| -0.0242*
| 0.0286**
| -0.0406***
| -0.2317***
| 1 | ||
CLOSE
| 0.0336**
| -0.1124***
| -0.0149 | -0.4046***
| 0.0174 | 0.0346**
| -0.0091 | 0.0400***
| 1 | |
Auditors
| -0.0608***
| 0.0364***
| 0.0263*
| 0.1221***
| -0.0285**
| 0.0374***
| 0.0512***
| -0.0176 | -0.1273***
| 1 |
4.2 Multivariate results
EQ1
|
EQ1+
|
EQ1-
| |
---|---|---|---|
Coeff. | Coeff. | Coeff. | |
(t-stat) | (t-stat) | (t-stat) | |
CSR
| -0.049*** | -0.034* | 0.067*** |
(-4.27) | (-1.87) | (4.81) | |
CG
| 0.031** | 0.021 | -0.044** |
(2.35) | (1.08) | (-2.54) | |
SIZE
| 0.000 | 0.001 | 0.001 |
(0.21) | (0.25) | (0.67) | |
MB
| 0.000 | 0.000 | -0.000 |
(0.82) | (0.10) | (-1.57) | |
ROA
| 0.118*** | 0.116** | -0.121*** |
(4.00) | (2.43) | (-3.67) | |
LEV
| -0.000 | -0.003 | -0.001 |
(-0.01) | (-0.10) | (-0.02) | |
CLOSE
| 0.031*** | 0.022 | -0.038*** |
(3.02) | (1.52) | (-2.69) | |
Auditors
| 0.007 | 0.007 | -0.014 |
(0.64) | (0.45) | (-0.92) | |
Constant
| 0.127*** | 0.111** | -0.172*** |
(4.14) | (2.39) | (-4.13) | |
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.141 | 0.120 | 0.199 |
F
| 19.836*** | 10.382*** | 11.812*** |
N
| 4781 | 2569 | 2212 |
EQ1
|
EQ1+
|
EQ1-
| |
---|---|---|---|
Coeff. | Coeff. | Coeff. | |
(t-stat) | (t-stat) | (t-stat) | |
CSR
| -0.053*** | -0.040** | 0.068*** |
(-4.59) | (-2.23) | (4.87) | |
Shariah
| 0.018*** | 0.028*** | -0.006 |
(3.28) | (3.39) | (-0.87) | |
CG
| 0.031** | 0.021 | -0.043** |
(2.32) | (1.06) | (-2.53) | |
SIZE
| -0.001 | -0.002 | 0.002 |
(-0.80) | (-0.74) | (0.89) | |
MB
| 0.000 | 0.000 | -0.000 |
(0.85) | (0.12) | (-1.57) | |
ROA
| 0.119*** | 0.120** | -0.121*** |
(4.07) | (2.53) | (-3.67) | |
LEV
| 0.007 | 0.011 | -0.003 |
(0.40) | (0.40) | (-0.10) | |
CLOSE
| 0.031*** | 0.022 | -0.038*** |
(3.10) | (1.57) | (-2.71) | |
Auditors
| 0.006 | 0.004 | -0.014 |
(0.49) | (0.25) | (-0.89) | |
Constant
| 0.148*** | 0.137*** | -0.179*** |
(4.72) | (2.91) | (-4.24) | |
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.143 | 0.124 | 0.199 |
F
| 19.416*** | 10.263*** | 11.494*** |
N
| 4781 | 2569 | 2212 |
EQ1
|
EQ1
|
EQ1
|
EQ1
| |
---|---|---|---|---|
Coeff. | Coeff. | Coeff. | Coeff. | |
(t-stat) | (t-stat) | (t-stat) | (t-stat) | |
SOCI
| -0.044*** | -0.047*** | ||
(-4.00) | (-4.31) | |||
ENVI
| -0.036*** | -0.038*** | ||
(-3.65) | (-3.89) | |||
Shariah
| 0.017*** | 0.017*** | ||
(3.25) | (3.14) | |||
Controls
|
Included
|
Included
|
Included
|
Included
|
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.140 | 0.140 | 0.142 | 0.141 |
F | 19.831*** | 19.785*** | 19.410*** | 19.352*** |
N
| 4781 | 4781 | 4781 | 4781 |
5 Additional analyses
5.1 Label vis-a-vis serious adopters of ethical codes
EQ1
|
EQ1
|
EQ1
|
EQ1
| |
---|---|---|---|---|
Coeff. | Coeff. | Coeff. | Coeff. | |
(t-stat) | (t-stat) | (t-stat) | (t-stat) | |
HCSRShariah
| 0.010 | |||
(1.60) | ||||
HCSRNon-Shariah
| -0.017*** | |||
(-3.78) | ||||
LCSRShariah
| 0.015** | |||
(2.05) | ||||
LCSRNon-Shariah
| 0.004 | |||
(0.86) | ||||
Controls
|
Included
|
Included
|
Included
|
Included
|
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.138 | 0.139 | 0.138 | 0.137 |
F | 19.701*** | 19.824*** | 19.724*** | 19.683*** |
N
| 4781 | 4781 | 4781 | 4781 |
5.2 Alternative EQ metrics
Panel A: The effect of CSR on alternative earnings quality metrics | ||||
EQ2
|
EQ3
|
EQ4
|
EQ5
| |
Coeff. | Coeff. | Coeff. | Coeff. | |
(t-stat) | (t-stat) | (t-stat) | (t-stat) | |
CSR
| -0.053*** | -0.039*** | -0.013** | -0.010** |
(-4.38) | (-2.94) | (-2.01) | (-1.96) | |
Controls
|
Included
|
Included
|
Included
|
Included
|
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.098 | 0.110 | 0.144 | 0.083 |
F
| 13.091*** | 10.352*** | 11.405*** | 7.432*** |
N
| 4781 | 4595 | 3824 | 4583 |
Panel B: The effect of CSR and membership in a Shariah index on alternative earnings quality metrics | ||||
EQ2
|
EQ3
|
EQ4
|
EQ5
| |
CSR
| -0.056*** | -0.039*** | -0.013** | -0.010** |
(-4.61) | (-2.96) | (-2.01) | (-1.96) | |
Shariah
| 0.013** | 0.008 | 0.009*** | -0.002 |
(2.13) | (1.17) | (2.92) | (-1.16) | |
Controls
|
Included
|
Included
|
Included
|
Included
|
Country/ Industry/ Year effects
|
Included
|
Included
|
Included
|
Included
|
Adj. R
2
| 0.099 | 0.110 | 0.147 | 0.083 |
F
| 12.807*** | 10.091*** | 11.168*** | 7.314*** |
N
| 4781 | 4595 | 3824 | 4583 |
5.3 Home-country characteristics
Panel A: Hofstede’s cultural dimensions. | ||||||
EQ1
|
EQ1
| |||||
Coeff. | Coeff. | |||||
(t-stat) | (t-stat) | |||||
CSR
| -0.045*** | -0.048*** | ||||
(-3.87) | (-4.20) | |||||
Shariah
| 0.018*** | |||||
(3.38) | ||||||
UA
| -0.004*** | -0.004*** | ||||
(-6.61) | (-6.45) | |||||
IND
| -0.003*** | -0.002*** | ||||
(-3.44) | (-3.24) | |||||
MAS
| 0.001** | 0.001** | ||||
(2.34) | (2.10) | |||||
PD
| 0.007*** | 0.007*** | ||||
(9.34) | (9.19) | |||||
LTO
| 0.003*** | 0.003*** | ||||
(4.39) | (4.01) | |||||
Controls
|
Included
|
Included
| ||||
Industry/ Year effects
|
Included
|
Included
| ||||
Adj. R
2
| 0.132 | 0.134 | ||||
F | 20.887*** | 20.363*** | ||||
N
| 4781 | 4781 | ||||
Panel B: Comparison between CMEs and LMEs. | ||||||
EQ1
| ||||||
CMEs
|
LMEs
|
Difference
|
CMEs
|
LMEs
|
Difference
| |
CSR
| -0.027* | -0.091*** | -0.081*** | -0.031* | -0.093*** | -0.057** |
(-1.68) | (-5.43) | (-1.94) | (-5.56) | |||
Shariah
| 0.022*** | 0.011 | -0.005 | |||
(3.00) | (1.49) | |||||
Controls
|
Included
|
Included
|
Included
|
Included
| ||
Industry/ Year effects
|
Included
|
Included
|
Included
|
Included
| ||
Adj. R
2
| 0.138 | 0.196 | 0.141 | 0.197 | ||
F | 10.791 | 20.065 | 10.548 | 19.388 | ||
N
| 2692 | 2089 | 2692 | 2089 |