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Islamic labeled firms: Revisiting Dow Jones measure of compliance
Author(s) -
Elnahas Ahmed,
Ismail Ghada,
ElKhatib Rwan,
Hassan M. Kabir
Publication year - 2021
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12507
Subject(s) - endogeneity , corporate social responsibility , islam , index (typography) , corporation , propensity score matching , business , instrumental variable , sharia , economics , accounting , actuarial science , law , finance , econometrics , political science , theology , statistics , philosophy , mathematics , world wide web , computer science
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.