<![CDATA[This study addresses the ongoing debate regarding whether Environmental, Social, and Governance (ESG) activities enhance firm financial stability, particularly in emerging markets where institutional and religious factors may shape this relationship. In addition, this research wants to know does Sharia-compliant states have an impact on the relationship between ESG activities and financial stability. By using 27 samples of companies during the period 2009-2019, this study estimates a two-step system GMM dynamic panel data model. The findings indicate that Sharia-compliant status exerts a selective and dimension-specific moderating effect on the relationship between ESG activities and financial stability. Although the ESG composite index demonstrates a direct positive association with financial stability, its interaction with Sharia compliance is negative and statistically significant. This suggests that aggregated ESG measures may mask the distinct legitimacy mechanisms that are particularly relevant for Sharia-compliant firms. Further disaggregated analysis reveals that Sharia-compliant significantly strengthens the positive effects of social and governance index on financial stability, reflecting a strong alignment between Islamic ethical principles and stakeholder expectations. In contrast, the moderating effect of Sharia-compliant on the environmental index is statistically insignificant to financial stability. Furthermore, these findings have important implications for investors, regulators, and companies in integrating ESG and Sharia values into corporate risk management and sustainability strategies.]]>
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