Islamic labeled firms: Revisiting Dow Jones measure of compliance

ORCID Identifiers

0000-0001-6274-3545

Document Type

Article

Source of Publication

Journal of Business Finance and Accounting

Publication Date

1-2-2021

Abstract

Billions of dollars, across 131 countries, are invested in Islamic law‐compliant funds that are often promoted as consistent with the spirit and overall objectives of Islam (Maqasid Al‐Sharia), thereby indicating they are more socially responsible, less risky, and less prone to failure. The empirical results of this study indicate that Shariah‐compliant firms identified by the Dow Jones do not have higher corporate social responsibility (CSR) scores, lower risk, or lower likelihood of failure than non‐compliant firms. We address endogeneity using the instrumental variable (IV) approach and selection bias using propensity score matching (PSM). Our results are similar when using the Dow Jones Islamic Market World, the Financial Times Stock Exchange Islamic Index, and the Hong Kong and Shanghai Banking Corporation indices and when using CSR scores provided by multiple databases. We create an index to measure compliance with Islamic law that overcomes several flaws in the binary measures currently employed in the industry. This index can help Shariah‐compliant funds to fulfill their promise by constructing portfolios that are both compliant with Islamic rulings and consistent with the spirit and objectives of Islam in being more socially responsible, less risky, and less prone to failure.

ISSN

0306-686X

Publisher

Blackwell Publishing Ltd

Disciplines

Business

Keywords

corporate bankruptcy, corporate social responsibility, Dow Jones Islamic Market Index, ethical screening, Islamic finance, Maqasid Al-Sharia, religiosity, risk, Shariah-compliant, threshold-style indices

Scopus ID

85099029810

Indexed in Scopus

yes

Open Access

yes

Open Access Type

Green: A manuscript of this publication is openly available in a repository

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