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Unpleasant arithmetic of socially responsible investment

Author

Listed:
  • Mohamed Arouri

    (GRM - Groupe de Recherche en Management - EA 4711 - UNS - Université Nice Sophia Antipolis (1965 - 2019) - UniCA - Université Côte d'Azur, UIR - Université Internationale de Rabat)

  • Guillaume Pijourlet

    (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020])

  • Benjamin Williams

    (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020])

Abstract

In this paper, we aim to model the impact of the presence of socially responsible investors on asset pricing. We predict that the presence of ethical investors leads to partially segmented markets, and thus market portfolio inefficiency. Indeed, if some investors do not want to hold some assets because of their ethical preferences, the other investors, which want to invest in all assets, need to take into account total risk instead of market risk, because a part of the idiosyncratic risk is no more diversifiable. We demonstrate that an unpleasant consequence of SRI is that since investors refuse to hold all assets because of ethical considerations, “unethical” firms must be priced lower than other firms, to compensate conventional investors for not being able to hold the market portfolio.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Mohamed Arouri & Guillaume Pijourlet & Benjamin Williams, 2020. "Unpleasant arithmetic of socially responsible investment," Post-Print hal-02861448, HAL.
    • Handle: RePEc:hal:journl:hal-02861448
    DOI: 10.1016/j.econlet.2020.109281
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    References listed on IDEAS

    as
    1. Derwall, Jeroen & Koedijk, Kees & Ter Horst, Jenke, 2011. "A tale of values-driven and profit-seeking social investors," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2137-2147, August.
    2. I. Girerd-Potin & S. Jimenez-Garces & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01333409, HAL.
    3. Galema, Rients & Plantinga, Auke & Scholtens, Bert, 2008. "The stocks at stake: Return and risk in socially responsible investment," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2646-2654, December.
    4. Isabelle Girerd-Potin & Sonia Jimenez-Garcès & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Journal of Business Ethics, Springer, vol. 121(4), pages 559-576, June.
    5. I. Girerd-Potin & S. Jimenez-Garces & P. Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01026389, HAL.
    6. I. Girerd-Potin & S. Jimenez-Garces & Pascal Louvet, 2014. "Which Dimensions of Social Responsibility Concern Financial Investors?," Post-Print halshs-01337706, HAL.
    7. Arouri, Mohamed El Hedi & Nguyen, Duc Khuong & Pukthuanthong, Kuntara, 2012. "An international CAPM for partially integrated markets: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2473-2493.
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    Cited by:

    1. Wang, Tianyu & Yang, Bo, 2023. "Corporate social responsibility, stakeholders’ governance and idiosyncratic risk," Finance Research Letters, Elsevier, vol. 57(C).
    2. Gallucci, Carmen & Santulli, Rosalia & Lagasio, Valentina, 2022. "The conceptualization of environmental, social and governance risks in portfolio studies A systematic literature review," Socio-Economic Planning Sciences, Elsevier, vol. 84(C).
    3. Lagerkvist, C.J. & Edenbrandt, A.K. & Tibbelin, I. & Wahlstedt, Y., 2020. "Preferences for sustainable and responsible equity funds - A choice experiment with Swedish private investors," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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