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Is Ethical Money Financially Smart?

Author

Listed:
  • Renneboog, L.D.R.

    (Tilburg University, TILEC)

  • Ter Horst, J.R.

    (Tilburg University, TILEC)

  • Zhang, C.

    (Tilburg University, TILEC)

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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Suggested Citation

  • Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2006. "Is Ethical Money Financially Smart?," Discussion Paper 2006-005, Tilburg University, Tilburg Law and Economic Center.
    • Handle: RePEc:tiu:tiutil:27ad9839-8974-408a-8094-8f155eb3a4c4
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2007. "Socially Responsible Investments : Methodology, Risk Exposure and Performance," Other publications TiSEM 1ff75080-22db-4909-9f13-a, Tilburg University, School of Economics and Management.
    4. Renneboog, L.D.R. & Ter Horst, J.R. & Zhang, C., 2007. "Socially Responsible Investments : Methodology, Risk and Performance," Other publications TiSEM 684d2aba-7b82-4306-b6a0-d, Tilburg University, School of Economics and Management.
    5. Kuti Monika & Szasz Erzsebet, 2014. "Challenges In Performance Metrics In Socially Responsible Investments," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 919-927, July.
    6. Mehmet Balcilar & Riza Demirer & Rangan Gupta, 2017. "Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations," Sustainability, MDPI, vol. 9(10), pages 1-18, October.
    7. repec:dau:papers:123456789/7349 is not listed on IDEAS
    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. 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.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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