Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds
TL;DR: In this paper, money flows into and out of socially responsible investment (SRI) funds around the world were studied and the role of nonfinancial attributes, which induce heterogeneity of investor clienteles within SRI funds.
About: This article is published in Journal of Financial Intermediation.The article was published on 2011-10-01. It has received 303 citations till now. The article focuses on the topics: Fund of funds & Closed-end fund.
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TL;DR: For example, this article found that firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings with respect to their legal origin.
Abstract: Using corporate social responsibility (CSR) ratings for 23,000 companies from 114 countries, we find that a firm's CSR rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi-natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms.
462 citations
TL;DR: In this paper, the authors find that corporate social responsibility is more strongly and consistently related to legal origins than to doing good by doing well, and most firm and country characteristics such as ownership concentration, political institutions, and degree of globalization.
Abstract: A firm’s corporate social responsibility (CSR) practice and its country’s legal origin are strongly correlated. This relation is valid for various CSR ratings coming from several large datasets that comprise more than 23,000 large companies from 114 countries. We find that CSR is more strongly and consistently related to legal origins than to “doing good by doing well”-factors, and most firm and country characteristics such as ownership concentration, political institutions, and degree of globalization. In particular, companies from common law countries have lower level of CSR than companies from civil law countries, and Scandinavian civil law firms assume highest level of CSR. This link between legal origins and CSR seems to be explained by differences in ex post shareholder litigation risk as well as in stakeholder regulations and state involvement in the economy. Evidence from quasi-natural experiments such as scandals and natural disasters suggest that civil law firms are more responsive to CSR shocks than common law firms, and such responsiveness is not likely driven by declining market shares following the shock.
452 citations
TL;DR: In this article, the authors link administrative data to survey responses and behavior in incentivized experiments to understand why investors hold socially responsible mutual funds, and find that both social preferences and social signaling explain socially responsible investment (SRI) decisions.
Abstract: To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.
439 citations
TL;DR: This paper showed that stocks with higher ES ratings have significantly higher returns, lower return volatility, and higher operating profit margins during the COVID-19 pandemic and the subsequent lockdown brought about an exogenous and unparalleled stock market crash The crisis thus provides a unique opportunity to test theories of environmental and social policies.
Abstract: The COVID-19 pandemic and the subsequent lockdown brought about an exogenous and unparalleled stock market crash The crisis thus provides a unique opportunity to test theories of environmental and social (ES) policies This paper shows that stocks with higher ES ratings have significantly higher returns, lower return volatility, and higher operating profit margins during the first quarter of 2020 ES firms with higher advertising expenditures experience higher stock returns, and stocks held by more ES-oriented investors experience less return volatility during the crash This paper highlights the importance of customer and investor loyalty to the resiliency of ES stocks
385 citations
Cites background from "Is ethical money financially smart?..."
...Shan and Tang (2020) document that Chinese firms with greater employee satisfaction appear to endure the COVID-19 stock market downturn better than other firms, supporting employee satisfaction as one dimension of ES policies creating shareholder value (Edmans 2011). In a cross-country analysis, Ding et al. (2020) provide evidence that firms with stronger balance sheets, less exposure to COVID-19, and more sustainable operations perform better during the first quarter....
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...Shan and Tang (2020) document that Chinese firms with greater employee satisfaction appear to endure the COVID-19 stock market downturn better than other firms, supporting employee satisfaction as one dimension of ES policies creating shareholder value (Edmans 2011)....
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TL;DR: In this paper, the authors present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being classified as high sustainability led to net inflows of over $24 billion.
Abstract: Examining a shock to the salience of the sustainability of the U.S. mutual fund market, we present causal evidence that investors marketwide value sustainability: being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high‐sustainability funds outperform low‐sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and nonpecuniary motives influencing investment decisions.
381 citations
References
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TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
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TL;DR: Using a sample free of survivor bias, this paper showed that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual fund's mean and risk-adjusted returns.
Abstract: Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns Hendricks, Patel and Zeckhauser's (1993) "hot hands" result is mostly driven by the one-year momentum effect of Jegadeesh and Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds The results do not support the existence of skilled or informed mutual fund portfolio managers PERSISTENCE IN MUTUAL FUND performance does not reflect superior stock-picking skill Rather, common factors in stock returns and persistent differences in mutual fund expenses and transaction costs explain almost all of the predictability in mutual fund returns Only the strong, persistent underperformance by the worst-return mutual funds remains anomalous Mutual fund persistence is well documented in the finance literature, but not well explained Hendricks, Patel, and Zeckhauser (1993), Goetzmann and Ibbotson (1994), Brown and Goetzmann (1995), and Wermers (1996) find evidence of persistence in mutual fund performance over short-term horizons of one to three years, and attribute the persistence to "hot hands" or common investment strategies Grinblatt and Titman (1992), Elton, Gruber, Das, and Hlavka (1993), and Elton, Gruber, Das, and Blake (1996) document mutual fund return predictability over longer horizons of five to ten years, and attribute this to manager differential information or stock-picking talent Contrary evidence comes from Jensen (1969), who does not find that good subsequent performance follows good past performance Carhart (1992) shows that persistence in expense ratios drives much of the long-term persistence in mutual fund performance My analysis indicates that Jegadeesh and Titman's (1993) one-year momentum in stock returns accounts for Hendricks, Patel, and Zeckhauser's (1993) hot hands effect in mutual fund performance However, funds that earn higher
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TL;DR: In this article, the authors examine the different methods used in the literature and explain when the different approaches yield the same (and correct) standard errors and when they diverge, and give researchers guidance for their use.
Abstract: In both corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms and across time, and OLS standard errors can be biased. Historically, the two literatures have used different solutions to this problem. Corporate finance has relied on clustered standard errors, while asset pricing has used the Fama-MacBeth procedure to estimate standard errors. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.
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TL;DR: This article analyzed how mutual fund performance relates to past performance and found evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns.
Abstract: This paper analyzes how mutual fund performance relates to past performance. These tests are based on a multiple portfolio benchmark that was formed on the basis of securities characteristics. We find evidence that differences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns.
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TL;DR: In this article, the authors argue that firms compete for reputational status in institutional fields and attempt to influence other stakeholders' assessments by signaling firms' salient advantages by signaling their salient advantages.
Abstract: Firms compete for reputational status in institutional fields. Managers attempt to influence other stakeholders' assessments by signaling firms' salient advantages. Stakeholders gauge firms' relati...
4,862 citations