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Is Ethical Money Financially Smart?Jenke Ter HorstTilburg University - Center for Economic Research (CentER) Chendi ZhangUniversity of Warwick - Finance Group Luc RenneboogTilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC) February 2006 ECGI - Finance Working Paper No. 117/2006 CentER Discussion Paper No. 2006-09 Abstract: Little is known about how investors select socially responsible investment (SRI) funds. Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fund performance. This paper studies the money-flows into and out of the SRI funds around the world. We find that ethical money chases past returns. In contrast to conventional funds' investors, SRI investors care less about the funds' riskiness and fees. Funds characterized by shareholder activism and by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family. SRI funds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry. Finally, funds employing a higher number of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds.
Number of Pages in PDF File: 52 Keywords: money-flows, ethical funds, socially responsible investing, persistence in performance, investment screens, corporate governance screens, SRI JEL Classification: G10, G19 working papers seriesDate posted: February 28, 2006Suggested CitationContact Information
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