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

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 significant causal relationship between stock market reactions and changes in the CEQ. 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 the CEQ conveys 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.

The Mapping Of Investor Perception On The High Financial Reporting Quality

“…This research is in line with (Ozili, 2016) and (Pompili & Tutino, 2019). Its practical implication includes a strong pressure on management to level up the financial reporting's quality, as supported by (Elayan et al, 2016) and (Bassiouny & Ragab, Mohamed Moustafa, Soliman, 2016), where high accuracy accounting information is protection for investment in the secured area. The high earnings quality has covered up the high tax regulation compliances concerning agency costs in the subsequent period.…”

“…High accounting standards minimize opportunistic motives, which is an obstacle in capturing real earnings. Previously, the investor demanded the management to publish high-quality financial reporting (Elayan, Li, Liu, Meyer, & Felton, 2016), this impact is low capital cost because high accruals negatively affect the market value due to a high probability of abnormal returns. The unpredictable fluctuation of the market price is attributed to disparities between actual and expected returns (Ping, 2016).…”

Media reputation: a source of banks' financial performance

“…In fact, corporate reputation, as a market signal, could be formed by various information signals transmitted by a firm or other information intermediaries (Fombrun and Shanley, 1990), as well as stakeholders' own perceptions and interpretations of the firm's actions (Fombrun, 2000). Correspondingly, the literature reveals various methods in measuring reputation: surveys of customers' perception (Lai et al , 2010; Alafi and Hasoneh, 2012; Galbreath and Shum, 2012; Pearson et al , 2015); survey of CEO/employees' perception (Aupperle et al , 1985; Davies et al , 2010); rankings of business reputation published by specialized magazines (Surroca et al , 2010; Lee and Roh, 2012; Elayan et al , 2014; Phillips et al , 2015); and the agenda-setting theory applicable to measure the media reputation (Deephouse, 1997, 2000).…”

Integrating corporate social responsibility and financial performance

“…First, a score for each category followed by the Ethical Quote of Covalence (EQC) which is calculated using the arithmetic mean. More details about the basic metrics used by Covalence are given in www.ethicalquote.com and Elayan et al (2016).…”