Sustainability-Disclosures and Financial Performance: Shariah Compliant vs Non-Shariah- Compliant Indonesian Firms

Abstract

We investigate the impact of sustainability-performance disclosure (SPD) on firmperformance on a cross-industry sample of 71 firms over the period 2011-2018. Wealso compare the relationship between shariah-compliant firms (SCFs) and non-shariah-compliant firms(NSCF). To control for possible issues of unobservedheterogeneity, endogeneity and autocorrelation, we use the system generalizedmethod of moments approach. We found that disclosure of sustainability performanceincreases a firm’s financial performance. Firms which disclose information on theirsustainability practices were found to have higher earnings on assets and equity,which clearly supports the argument of information asymmetry. In the comparison ofshariah-compliant and non-shariah-compliant firms, it was found that SCFs are at anadvantage by being shariah compliant and that disclosure of sustainabilityperformance increases the financial performance of such firms, whereas for non-shariah-compliant firms, the impact was found to be negative. One of the mainfindings from the research is that while firms’ involvement in corporate sustainabilityactivities is encouraged, they also need to disclose any related information to theirstakeholders, general public to capitalise on this investment, in return for a goodreputation and consider going shariah complaint. Our study further recommends thatthe management of firms in Indonesia should focus on shariah compliance andconsider sustainability-practice and sustainability-performance disclosures with apositive mindset, recognising them as means of gaining an advantage rather than asan obligation.

The effects of corporate disclosure on firm value and firm performance: evidence from Turkey

“…Firms operating in harmony with stakeholder expectations can increase their performance by meeting these expectations and, in turn, firm value can be increased. Previous studies provided evidence about the relationship between transparency, disclosure and firm performance (Brown and Caylor, 2009; Iatridis, 2008; Al-Sartawi, 2018; Khattak et al , 2020). Disclosure of information to the public can be considered as a responsibility of managers and a necessity to achieve certain business and financial goals.…”

Shariah compliance and stock price synchronicity: evidence from India

“…Does compliance with Islamic principles affect the stock price synchronicity? This paper aims to answer this question by maintaining that better information environment associated with shariah-compliant firms is the major reason underlying this relationship (Farooq and AbdelBari, 2015;Khattak et al, 2020). We argue that differences between the financial characteristics (levels of debt, cash and account receivables) of shariah-compliant firms and non-compliant firms lead to a very different information environment in these firms.…”

“…Does compliance with Islamic principles affect the stock price synchronicity? This paper aims to answer this question by maintaining that better information environment associated with shariah-compliant firms is the major reason underlying this relationship (Farooq and AbdelBari, 2015; Khattak et al. , 2020).…”