Does Ethical Reinforcement Pay? Evidence from the Canadian Mutual Fund Industry in the Post‐Financial Crisis Era

Abstract

AbstractThis study elucidates the link and effect ofethical reinforcement in the post‐financial crisis eraby taking two congruent directions to demonstrate that ethical reinforcement can be accomplished by either a continuous ethical training or a meticulous code of business ethics—which members of the mutual fund industry claim they adhere to—asbothhave a positive effect on the funds’ performance, including sizeable gains to investors. Furthermore, evidence divulges that ethical reinforcement moderates the performance of ethical or socially responsible investments (SRI) funds more than nonethical investments, suggesting that a perspective of ethical or SRI classification of a fund aloneis not sufficient, but it is necessary to have the institutional ethical environment and/or managers’ continuous ethical training. This result supports the notion of financial market discipline and reveals some factors behind SRI or ethical funds returns, notably during the period following the recent financial crisis.