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

Fayez A. Elayan, Jingyu Li, Zhefeng Frank Liu, Thomas O. Meyer, Sandra Felton

Journal of Business Ethics · 2016 · Volume 134 · Issue 3

Abstract

We 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. The index is updated quarterly and is comprehensive enough to include 45 criteria reflecting working conditions, impact of product, impact of production, and company institutional impact. Thus, it captures many dimensions of firms’ ethical performance that are not accounted for in previous research. Our research encompasses a joint test of the value relevance of the index itself and the impact of ethical reputation on a firm’s value. We find first a significantcausalrelationship between stock market reactions and changes in theCEQ. 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 theCEQconveys 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.

Keywords

Ethical performance, FRQ, Corporate social responsibility, FP

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