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Moral Behavior in Stock Markets: Islamic finance and socially responsible investment

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  • Pitluck, Aaron Z.
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    Abstract

    This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market. Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper argues that moral investment behavior in stock markets is shaped primarily by ‘market structure’ rather than by ‘mandates.’ In both countries mandates are a weak form of social control of fund manager’s behavior. This is because mandates are not principal-agent contracts but are primarily marketing exercises and cultural tools. Social investing in the United States is weak because it relies solely on mandates to communicate clients’ ethical desires to their fund managers. Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market’s structure. Specifically, a uniform interpretation of Islamic investing was institutionalized with the creation of a nearly-unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future. The paper closes with implications for social investment in the United States.

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    File URL: http://mpra.ub.uni-muenchen.de/9477/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9477.

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    Date of creation: 15 Mar 2008
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    Handle: RePEc:pra:mprapa:9477

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    Keywords: Investor Behavior; Ethics; Malaysia; United States; Islamic Finance; Socially Responsible Investment;

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    1. Michael J. Cooper & Huseyin Gulen & P. Raghavendra Rau, 2005. "Changing Names with Style: Mutual Fund Name Changes and Their Effects on Fund Flows," Journal of Finance, American Finance Association, vol. 60(6), pages 2825-2858, December.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    3. Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
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