Environmental, Social And Governance Disclosure And Profitability: Gcc Banks’ Comparative Study

Abstract

The main aim of this thesis is to investigate the relationship between Voluntary disclosure (VD) and profitability of publicly traded banks operating in the GCC region over the period 2007-2017. We incorporate stakeholder theory and agency theory to gain insights about VD and profitability. Based on stakeholder theory, agency theory and prior studies, we developed three hypotheses. The first hypothesis states that Islamic banks disclose more compared to conventional banks, the second hypothesis states that higher the VD, higher the bank’s profitability and the third hypothesis states that profitable banks engage more in VD. The sample covers 57 banks, out of which, 22 are Islamic and 35 are conventional banks. For this purpose, Environmental, Social and Governance (ESG) factors are considered as components of VD. Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q are used as measures of profitability. To find our results, we implemented two-step system generalized method of moments (GMM) estimator. The main findings of the thesis are: First, Islamic banks have low ESG disclosures as compared to conventional banks. Second, ESG disclosure affects all the measures of profitability inversely, which suggests that ESG activities are costly for GCC banks. Finally, we find that ESG disclosure is positively affected by accounting measures of profitability (i.e. ROA and ROE). This suggests that high profitable banks are more visible in the market, thus, they disclose more ESG information to meet the social norms, since, more information is essential to reduce the level of asymmetric information between managers, bank owners, and depositors. This thesis contributes to the literature in different ways: First, it enriches the literature on Islamic banks and VD as there is a lack of studies that dealt with this issue in the literature. Second, this is one of the first studies that compared between ESG disclosure in both Islamic and conventional banks and its relation to bank profitability. Third, up to the researcher’s knowledge, this is the first study that suggested a bi-directional relationship between ESG disclosure and bank profitability. This study is useful for all stakeholders and especially investors. As markets expand, it is essential that sufficient information is made available to market participants in order to facilitate their investment and financing decisions. Given our results that ESG disclosure is costly for banks in the GCC, it is important that policy makers put some rules to encourage banks to be more socially responsible.