Journal of Business Ethics

, Volume 137, Issue 1, pp 83–99

Ethical Screening and Financial Performance: The Case of Islamic Equity Funds

Article
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Abstract

Whether ethical screening affects portfolio performance is an important question that is yet to be settled in the literature. This paper aims to shed further light on this question by examining the performance of a large global sample of Islamic equity funds (IEFs) from 1984 to 2010. We find that IEFs underperform conventional funds by an average of 40 basis points per month, consistent with the underperformance hypothesis. In line with popular media claims that Islamic funds are a safer investment, IEFs outperformed conventional funds during the recent banking crisis. However, we find no such outperformance for other crises or high volatility periods. Based on fund holdings-based data, we provide evidence of a negative curvilinear relation between fund performance and ethical screening intensity, consistent with a return trade-off to being more ethical.

Keywords

Ethical investments Ethical screening Fund performance Islamic equity funds 

Abbreviations

BRIC

Brazil, Russia, India and China

CEF

Conventional equity fund

IEF

Islamic equity fund

GCC&MENA

Gulf Cooperation Council and Middle East North Africa

SAB

Shariah Advisory Board

SRI

Socially responsible investment

JEL Classification

A13 G11 G12 G23 G34 Z12 

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Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  • Yunieta Nainggolan
    • 1
    • 2
  • Janice How
    • 1
  • Peter Verhoeven
    • 1
  1. 1.School of Economics and FinanceQueensland University of TechnologyBrisbaneAustralia
  2. 2.BrisbaneAustralia

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