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Ethical Screening and Financial Performance: The Case of Islamic Equity Funds

Author

Listed:
  • Yunieta Nainggolan

    () (Queensland University of Technology)

  • Janice How

    () (Queensland University of Technology)

  • Peter Verhoeven

    () (Queensland University of Technology)

Abstract

Abstract Whether ethical screening affects portfolio performance is an important question that is yet to be settled in the literature. This paper aims to shed further light on this question by examining the performance of a large global sample of Islamic equity funds (IEFs) from 1984 to 2010. We find that IEFs underperform conventional funds by an average of 40 basis points per month, consistent with the underperformance hypothesis. In line with popular media claims that Islamic funds are a safer investment, IEFs outperformed conventional funds during the recent banking crisis. However, we find no such outperformance for other crises or high volatility periods. Based on fund holdings-based data, we provide evidence of a negative curvilinear relation between fund performance and ethical screening intensity, consistent with a return trade-off to being more ethical.

Suggested Citation

  • Yunieta Nainggolan & Janice How & Peter Verhoeven, 2016. "Ethical Screening and Financial Performance: The Case of Islamic Equity Funds," Journal of Business Ethics, Springer, vol. 137(1), pages 83-99, August.
  • Handle: RePEc:kap:jbuset:v:137:y:2016:i:1:d:10.1007_s10551-014-2529-5
    DOI: 10.1007/s10551-014-2529-5
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    References listed on IDEAS

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    Cited by:

    1. Elnahas, Ahmed M. & Kabir Hassan, M. & Ismail, Ghada M., 2017. "Religion and mergers and acquisitions contracting: The case of earnout agreements," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 221-246.
    2. Ali, Mohsin & Azmi, Wajahat, 2016. "Religion in the boardroom and its impact on Islamic banks' performance," Review of Financial Economics, Elsevier, vol. 31(C), pages 83-88.

    More about this item

    Keywords

    Ethical investments; Ethical screening; Fund performance; Islamic equity funds;

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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