Abstract
This study formulates a two-factor empirical model under the intertemporal CAPM framework to evaluate the cross-sectional implications of socially responsible investments in the US equity market. Our results show that socially responsible investments have no asset pricing impact on the US market. We argue that this ‘no financial impact’ finding indicates that investors will not be disadvantaged financially by investing in socially responsible funds or corporations.
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Notes
The ICAPM is a linear factor model of wealth (the market factor) and state variables (economic variables) that can explain the cross-sectional variation of asset returns (Cochrane, 2005). Such a framework has been widely adopted throughout the literature in explaining asset returns under an intertemporal economy (e.g. Chen et al. (1986); Campbell (1996); Vassalou (2003); Hsu and Huang (2010); Kim et al. (2011) and Kang et al. (2011)).
http://www.ussif.org/Files/Publications/SIF_Trends_14.F.ES.pdf (date accessed, 24/9/15).
For instance, one of the potential long-term benefits of SRI relates to the development of new (e.g. environmentally friendly) technology, which ultimately creates long-term competitive advantages (Porter and Kramer, 2006).
In this study, the costs and benefits are discussed to highlight that two opposing factors are at play with different time dimensions. We are not concerned with trying to empirically disentangle the costs and benefits—this is not of relevance in an asset pricing framework. Rather, the “net effect” of the two is what really matters and is our focus.
For examples of studies that use these performance metrics, see, Luther et al. (1992); Hamilton et al. (1993); Luther and Matatko (1994); Statman (2000); Derwall et al. (2005); Bauer et al. (2005); Bauer et al. (2006); Mill (2006); Bauer et al. (2007); Hill et al. (2007); Renneboog et al. (2008b) and Gil-Bazo et al. (2010).
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Xiao, Y., Faff, R., Gharghori, P. et al. The Financial Performance of Socially Responsible Investments: Insights from the Intertemporal CAPM. J Bus Ethics 146, 353–364 (2017). https://doi.org/10.1007/s10551-015-2894-8
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DOI: https://doi.org/10.1007/s10551-015-2894-8