Articlehybrid2016

Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality

Abdullah Alsaadi · Muhammed Shahid Ebrahim · Aziz Jaafar

107 citations0/0 files storedJournal of Financial Services Research

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Auditing, Earnings Management, Governance Corporate Social Responsibility Reporting Corporate Governance and Financial Management

Abstract

This study examines the effect of two potential sources of ethical principles on earnings quality: corporate social responsibility (CSR) and membership in a Shariah index. We define membership in a Shariah index as the adherence to an ethical code that relates to Islam. Our sample comprises firms in ten European Union countries for the period from 2003 to 2013. The empirical results show that firms with a high degree of CSR are less likely to manage earnings. In contrast, membership in a Shariah index leads to earnings manipulation. Our results are robust after using several alternative quality metrics for earnings. Furthermore, our empirical results indicate that highly rated CSR firms that are not Shariah-compliant are less likely to engage in earnings manipulation. Further, institutional factors are also important in determining the link between CSR, Shariah-compliance, and the quality of financial reporting.

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References

2002Culture's Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations 1998Law and Finance 2007The Social Responsibility of Business Is to Increase Its Profits 1979A Three-Dimensional Conceptual Model of Corporate Performance 1991The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders 2001Varieties of Capitalism 1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures

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