SUSTAINABILITY-DISCLOSURES AND FINANCIAL PERFORMANCE: SHARIAH COMPLIANT VS NON-SHARIAH- COMPLIANT INDONESIAN FIRMS
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.
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