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The Price of Ethics: Evidence from Socially Responsible Mutual Funds

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

    (Tilburg University, Tilburg Law and Economics Center)

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.

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Bibliographic Info

Paper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2007-012.

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Date of creation: 2007
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Handle: RePEc:dgr:kubtil:2007012

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

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  2. Bauer, Rob & Otten, Róger & Tourani-Rad, Alireza, 2006. "Ethical investing in Australia: is there a financial penalty?," Open Access publications from Maastricht University urn:nbn:nl:ui:27-19319, Maastricht University.
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  5. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2006. "Is Ethical Money Financially Smart?," Discussion Paper 2006-005, Tilburg University, Tilburg Law and Economic Center.
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Cited by:
  1. Richard Copp & Michael L. Kremmer & Eduardo Roca, 2010. "Should funds invest in socially responsible investments during downturns?: Financial and legal implications of the fund manager's dilemma," Accounting Research Journal, Emerald Group Publishing, vol. 23(3), pages 254 - 266, November.
  2. 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.
  3. 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.

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