The price of ethics and stakeholder governance: The performance of socially responsible mutual funds |
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Authors: | Luc Renneboog Jenke Ter Horst Chendi Zhang |
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Institution: | aCentER, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands;bEuropean Corporate Governance Institute (ECGI), Brussels, Belgium;cWarwick Business School, University of Warwick, CV4 7AL Coventry, UK |
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Abstract: | Do investors pay a price for investing in socially responsible investments (SRI) funds, or do they obtain superior returns? This paper investigates these under- and overperformance hypotheses for all SRI funds across the world. Consistent with investors paying a price for ethics, SRI funds in the US, the UK, and in many continental European and Asia-Pacific countries underperform their domestic benchmarks by ? 2.2% to ? 6.5%. However, with the exception of some countries such as France, Japan and Sweden, the risk-adjusted returns of SRI funds are not statistically different from the performance of conventional funds. We also find that the underperformance of SRI funds is not driven by loadings on an ethics style factor. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying funds that will perform poorly. Finally, corporate governance and social screens yield lower risk-adjusted returns. |
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Keywords: | Ethical mutual funds Socially responsible investing Investment screens Smart money Risk loadings |
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