Abstract

http://ssrn.com/abstract=985265
 
 

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The Price of Ethics: Evidence from Socially Responsible Mutual Funds


Jenke Ter Horst


Tilburg University - Center for Economic Research (CentER)

Chendi Zhang


University of Warwick - Finance Group

Luc Renneboog


Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

May 2007

ECGI - Finance Working Paper No. 168/2007
TILEC Discussion Paper No. 2007-012
CentER Discussion Paper Series No. 2007-29

Abstract:     
This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. 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 ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds' riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.

Number of Pages in PDF File: 51

Keywords: ethics, mutual funds, socially responsible investing, investment screens, smart money, risk loadings

JEL Classification: G12, G34, A13, Z13

working papers series


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Date posted: May 10, 2007  

Suggested Citation

ter Horst, Jenke and Zhang, Chendi and Renneboog, Luc, The Price of Ethics: Evidence from Socially Responsible Mutual Funds (May 2007). ECGI - Finance Working Paper No. 168/2007; TILEC Discussion Paper No. 2007-012; CentER Discussion Paper Series No. 2007-29. Available at SSRN: http://ssrn.com/abstract=985265 or http://dx.doi.org/10.2139/ssrn.985265

Contact Information

Jenke R. Ter Horst
Tilburg University - Center for Economic Research (CentER) ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Chendi Zhang
University of Warwick - Finance Group ( email )
Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain
Luc Renneboog (Contact Author)
Tilburg University - Department of Finance ( email )
P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Tilburg Law and Economics Center (TILEC)
Warandelaan 2
Tilburg, 5000 LE
Netherlands
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