Abstract
An increasing percentage of the total net assets under professional management is devoted to ethical investments. Socially responsible investment (SRI) funds have a dual objective: building an investment strategy based on environmental, social, and corporate governance (ESG) screens and providing financial returns to investors. In the current study, we investigate whether this dual objective has an influence on the behavior of mutual fund managers in the realization of gains and losses. Evidence has shown that most investors in SRI funds invest in those funds primarily because of their social concerns. If the motivations of SRI managers align with those of SRI investors, SRI managers might then have more incentives than conventional managers to hold onto losing stocks if they feel their social value compensates for the economic loss. We hypothesize that SRI managers would be less prone to the disposition effect than conventional managers. Pertaining to the disposition effect, we do not find evidence of a difference in the behavior of SRI fund managers compared with that of conventional fund managers. Our results hold, even when considering market trends, management structure, gender, and prior performance.
Highlights
The demand for socially responsible investment (SRI) funds has grown exponentially in the last two decades in all major financial markets in the world
A question arises in our analysis on the possibility of differences in the realization of gains and losses for SRI mutual fund managers compared with conventional managers under different market trends
Contrariwise, based on the prime role of emotions in the onset of the disposition effect demonstrated by Summers and Duxbury [22], it is possible that emotions become more extreme due to groupthink [44]
Summary
The demand for socially responsible investment (SRI) funds has grown exponentially in the last two decades in all major financial markets in the world. Sustainable Investment Alliance [1], in the five leading financial markets Reported a 42% increase in U.S.-domiciled assets under management using SRI strategies over two years: from USD 12 trillion at the beginning of 2018 to USD 17.1 trillion at the start of 2020. This report affirms that ethical investments represented one in three dollars of the total value of assets under professional management in 2020 An extensive body of literature focuses on evaluating the performance of SRI mutual funds in different financial markets, especially compared with conventional funds or against benchmarks.
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