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Is Ethical Money Financially Smart?

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Author Info

  • Renneboog, L.D.R.
  • Horst, J.R. ter
  • Zhang, C.

    (Tilburg University, Tilburg Law and Economics Center)

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.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2006-005.

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Date of creation: 2006
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Handle: RePEc:dgr:kubtil:2006005

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Web page: http://www.tilburguniversity.nl/tilec/

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Cited by:
  1. Javier Gil-Bazo & Pablo Ruiz-Verdú & André Santos, 2010. "The Performance of Socially Responsible Mutual Funds: The Role of Fees and Management Companies," Journal of Business Ethics, Springer, vol. 94(2), pages 243-263, June.
  2. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "The Price of Ethics: Evidence from Socially Responsible Mutual Funds," Discussion Paper 2007-012, Tilburg University, Tilburg Law and Economic Center.
  3. Grundel, S. & Borm, P.E.M. & Hamers, H.J.M., 2013. "Resource Allocation Problems with Concave Reward Functions," Discussion Paper 2013-070, Tilburg University, Center for Economic Research.
  4. Renneboog, Luc & Ter Horst, Jenke & Zhang, Chendi, 2008. "The price of ethics and stakeholder governance: The performance of socially responsible mutual funds," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 302-322, June.
  5. Ainulashikin Marzuki & Andrew C. Worthington, 2011. "Comparative fund flows for Malaysian Islamic and conventional domestic managed equity funds," Discussion Papers in Finance finance:201118, Griffith University, Department of Accounting, Finance and Economics.
  6. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk and Performance," Discussion Paper 2007-31, Tilburg University, Center for Economic Research.
  7. Miwa Nakai & Tomonori Honda & Nariaki Nishino & Kenji Takeuchi, 2013. "An Experimental Study on Motivations for Socially Responsible Investment," Discussion Papers 1314, Graduate School of Economics, Kobe University.
  8. Benson, Karen L. & Humphrey, Jacquelyn E., 2008. "Socially responsible investment funds: Investor reaction to current and past returns," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1850-1859, September.
  9. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk Exposure and Performance," Discussion Paper 2007-013, Tilburg University, Tilburg Law and Economic Center.

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