The cost of being ethical : evidence from Islamic equity funds

Nainggolan, Yunieta, How, Janice, & Verhoeven, Peter (2013) The cost of being ethical : evidence from Islamic equity funds. In Vermaelen, Theo & Wolff, Christian (Eds.) Financial Management Association European Conference, 12 - 14 June 2013, Luxembourg.

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Abstract

This paper examines the relationship between financial performance and ethical screening intensity of a special class of ethical funds that is rooted in Islamic values – Islamic equity funds (IEFs). These faith-based ethical funds screen investments on compliance with Islamic values where conventional interest expense (riba), gambling (maysir), excessive uncertainty (gharar), and non-ethical (non-halal) products are prohibited. We test whether these extra screens affect the financial performance of IEFs relative to non-Islamic funds. Based on a large survivorship-free international sample of 387 Islamic funds, our results show that IEFs on average underperform conventional funds by 40 basis points per month, or 4.8% per year (supporting the underperformance hypothesis). While Islamic funds do not generally perform better during crisis periods, they outperformed conventional funds during the recent sub-prime crisis (supporting the outperformance hypothesis). Using holdings-based measures for ethical screening intensity, results show IEFs that apply more intensive screening perform worse, suggesting that there is a cost to being ethical.

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ID Code: 58600
Item Type: Conference Paper
Refereed: Yes
Keywords: ethical screening intensity, financial crisis, fund performance, Islamic equity funds, socially responsible investment
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2013 The Author(s)
Deposited On: 30 Apr 2014 01:57
Last Modified: 02 May 2014 03:02

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