COVID-19 and operating performance: evidence from Shariah-compliant and non-compliant firms

Purpose This study aims to investigate the impact of the COVID-19 pandemic on the operating performance of Shariah-compliant (SC) and non-Shariah-compliant (NSC) firms in the USA, addressing a critical gap in the literature on firm-level operational resilience during unexpected economic shocks. Understanding the operational impact is crucial as the pandemic caused significant disruptions across all sectors, and these effects are reflected in firms’ financial statements. Design/methodology/approach Using a unique data set from LSEG Workspace and S&P’s Compustat North America, the authors analyze quarterly financial statement data for US firms from 2018 to 2022. The authors use rigorous matching techniques, various model specifications and control for the potentially endogenous nature of a firm’s SC status to ensure robust comparisons between SC and NSC firms. Findings The authors show that while COVID-19 negatively impacted the profitability of all firms, the decline was significantly less severe for SC firms. This resilience can be attributed to the lower leverage and conservative financial practices inherent to Shariah compliance, which enhance firms’ ability to withstand economic shocks. The results are robust across different measures of operating profitability and various robustness tests. Practical implications The findings highlight the importance of financial conservatism in SC firms as a buffer against economic shocks. This has significant implications for corporate risk management, investment strategies and policy formulation. Adopting similar financial disciplines can enhance operational resilience, making SC firms attractive to investors seeking stability during economic uncertainty. Policymakers can also promote these practices to strengthen economic stability in anticipation of future systemic shocks. Overall, this study underscores the critical role of financial structure in determining corporate resilience. Originality/value To the best of the authors’ knowledge, this study provides the first large-scale empirical evidence on the differential impact of COVID-19 on the operating performance of SC versus NSC firms. By shifting the focus from stock price performance to operational performance and profitability, the authors offer a novel perspective on the benefits of Shariah compliance. The findings have important implications for investors, corporate managers and policymakers, highlighting the strategic value of conservative financial practices in enhancing firm resilience during economic downturns.