Working Papers

Fund Performance and Social Responsibility: New Evidence using Social Active Share and Social Tracking Error

with Sadok El Ghoul (Revise & Resubmit at the Journal of Banking and Finance) Download


Presented at the Financial Management Association Meeting (FMA 2020) and Southern Finance Association Meeting (SFA 2020)

We examine the effects of socially responsible investing (SRI) on mutual fund performance. We use two proxies of deviation from SRI: social active share (SAS) and social tracking error (STE) which, respectively, capture the differences in holdings and returns between a fund and a socially responsible index, namely the MSCI KLD 400. Using a sample of 2516 U.S. mutual funds over the period 2010-2017, our univariate analysis shows that less socially responsible funds do not outperform more socially responsible funds. The multivariate analysis shows, however, some evidence that more socially responsible funds display higher risk-adjusted performance than their less socially responsible peers. Our results are consistent with the hypothesis that SRI does not significantly damage fund performance.

Fund Names vs. Family Names: Implications for Mutual Fund Flows

with Sadok El Ghoul, (Revise & Resubmit at the Financial Review, 2nd round) Download

To be presented at the Eastern Finance Association Meeting (2021)

An emerging literature has shown that investors are sensitive to mutual fund names. Using a sample of US equity funds over the period 1993-2017, we provide evidence that funds with a name closer to the family’s name attract more flows and display a stronger performance-flow relationship. We also find that retail investors, in comparison to institutional investors, are more affected by this name bias. Our results are in line with the literature on social biases and costly searches and show that seemingly innocuous differences in fund attributes – such as fund names – translate into significant differences in investor decisions.

Systematic ESG Risk and Stock Returns: Evidence from the United States during the 1991-2019 Period

with Duc Khuong Nguyen (Revise & Resubmit at Business Ethics, the Environment & Responsibility, 2nd round ) Download

Using a sample of U.S. stocks over the period 1991-2019, we test whether stocks with high systematic ESG risk exhibit high returns. Our in-sample results show that stocks with high sensitivities to the MSCI KLD 400 social index underperform stocks with low sensitivities by an annual risk-adjusted performance of 7.02%. The negative premium is also larger in the post-crisis period of 2007-2019 and is equal to 10.25%. The out-of-sample results offer, however, only weak evidence of such a finding, with a risk-adjusted performance difference of merely -0.84% over the full sample period and no significant differences between the pre-crisis and post-crisis periods. Moreover, we find that stocks with high systematic ESG risk display high total risk, and a high market beta, high SMB coefficient, low HML coefficient, and small MOM coefficient.

The Green and Brown Performances of Mutual Fund Portfolios

with Sadok El Ghoul, Saurin Patel, and Srikanth Ramani (Submitted) Download

To be presented at the SFG2021 - Sustainable Finance and Governance workshop

A huge interest has emerged, in the mutual fund industry, in socially responsible investing (SRI). Central to this development is whether SRI funds underperform conventional funds. Using a novel approach, we decompose mutual fund portfolios into socially responsible (green) and non-socially responsible (brown) components. We find that, in comparison to the non-socially responsible component, the socially responsible part exhibits a lower raw return, lower risk-adjusted return, lower Sharpe ratio, and similar degree of performance reversal. The magnitudes of these underperformances are, however, small and align with SRI having a limited negative impact on fund performance yet offering some diversification benefits.