A selection of interesting articles we found recently on ethics in the finance world.
Identifying the determinants of the decision to create socially responsible funds: An empirical investigation
This paper proposes an empirical assessment of the main factors behind the decision of a corporate sponsor to launch a socially responsible (SR) fund. This analysis is performed on a database that encompasses 414 SR fund creations by 46 corporate sponsors between 1990 and 2012.
Jonathan Peillex & Loredana Ureche-Rangau provide evidence that economic and human resources slack, leverage, low media coverage and high extra-financial performance of the corporate sponsor contribute to an increase of the probability to propose SR funds. These results lead us to argue that the introduction of such funds goes beyond the economic objective of enlarging the market share of the corporate sponsor. It may thus be seen as a particular strategy in terms of communication and signaling, due to the specific characteristics of SR funds.
The full paper is available at: Jonathan Peillex & Loredana Ureche-Rangau. 2016. Identifying the determinants of the decision to create socially responsible funds: an empirical investigation.
Journal of Business Ethics, 136(1), 101-117.
Reassessing the ethicality of some common financial practices
Depositors have perceived banks as acting unethically during the most recent recession. One area of consternation is the ambiguity of the legal obligations entailed by the deposit contract when it is backed with only fractional reserves. In this article, we apply an existing analysis of the legitimacy and ethicality of banking practices to a wider range of financial transactions, including insurance policies, securities lending, perpetual bonds, and callable loans.
Securities lending in particular creates rights violations analogous to those in fractional-reserve banking. Both callable loans and perpetual bonds have clear legal obligations which are not inherently problematic, though we herein clarify what these obligations are. Finally, we apply our ethical framework to demonstrate that insurance products are distinct from banking deposit contracts, and that perceived parallels between the two products underestimate these differences.
Find out more at: Philipp Bagus, Amadeus Gabriel & David Howden. 2016. Reassessing the Ethicality of Some Common Financial Practices.
Journal of Business Ethics, 136(3), 471-480.
Do socially responsible investment policies add or destroy stock portfolio value?
Using a new dataset of environmental, social, and corporate governance company ratings for the European market, this article examines whether socially responsible stock selection adds or destroys value in terms of portfolio performance.
From 2004 to 2012, we find the following:
(i) Negative screens excluding unrated stocks from a representative European stock universe allow investors to significantly outperform a passive investment in a diversified European stock benchmark portfolio.
(ii) Additional negative screens based on environmental and social scores neither add nor destroy portfolio value, when cut-off rates are not too high. In contrast, governance screens can significantly increase portfolio performance under similar conditions. Thus, investors in the European stock market can do (financially) well while doing (socially) good.
(iii) Because of a loss of diversification, positive screens can cause portfolios to underperform the benchmark. This implies that investors should concentrate on eliminating the worst firms.
(iv) Our results are robust along several dimensions, namely, choice of performance measure, time, test parametrisation, portfolio weighting scheme, approximation of the risk-free rate, and consideration of transaction costs.
See more at: Benjamin R. Auer. 2016. Do Socially Responsible Investment Policies Add or Destroy European Stock Portfolio Value?
Journal of Business Ethics, 135(2), 381-397.
Ethical screening and financial performance: the case of Islamic equity funds
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.
Find the article at: Nainggolan, Y., How, J. & Verhoeven, P. 2016. Ethical screening and financial performance: the case of Islamic equity funds.
Journal of Business Ethics, 137(1), 83-99.
Making loan decisions in banks: straight from the gut?
When a business owner approaches a bank for a loan for their business they might hope that a well-established bureaucratic procedure would ensure that their application was processed with stipulated rules and impersonal criteria. They might expect that two bank officials, evaluating the same proposal for a loan, would reach the same decision. However, research shows that both quantifiable data and “gut feelings” are used in the decision.
In this research, analysis of interviews with senior managers, and both individual and focus group interviews with bank loan officers, reveals that there are no set criteria or stipulated rules. The interviews demonstrate how and why nonquantifiable data is used, and why different bank officials can reach different conclusions on the same loan proposal. While these bank loan officers do not appear to be discriminatory against female business owners, the lending criteria and process allows significant room for discrimination. It appears questionable whether bank lending is seen as an ethical and fair process.
For more detail see: Fiona Wilson. 2016. Making loan decisions in banks: straight from the gut?
Journal Of Business Ethics, 137(1), 53-63.
Accounting ethics in unfriendly environments: the educational challenge
In recent years, and in close connection with a number of well-known financial malpractice cases, public debate on business ethics has intensified worldwide, and particularly in ethics-unfriendly environments, such as Spain, with many recent fraud and corruption scandals. In the context of growing consensus on the need of balancing social prosperity and business profits, concern is increasing for introducing business (and particularly accounting) ethics in higher education curricula.
The purpose is to improve ethical behaviour of future business people, and of accounting professionals in particular. In this study, from a sample of 551 business students at a Spanish university, the importance of accounting ethics is investigated. The aim of this paper is twofold. First, we attempt to examine students’ overall perceptions of business ethics in unfriendly environments and, specifically, their views on the importance and goals of accounting ethics education. Second, we intend to investigate whether potential differences in such perceptions depend on previous business ethics courses taken, gender, and age of students.
Our results show that those students who have previously taken an ethics course are especially prone to considering that accounting education should include ethical considerations, and show greater interest in further introducing this subject in their curricula. These facts should encourage universities offering business degrees in ethics-unfriendly environments to extend the implementation of ethics courses in their curricula. Besides, significant differences in students’ perceptions on the importance of accounting ethics are found depending on their gender and age.
In line with previous research findings, female and older students show more ethical inclinations than, respectively, male and younger students. Thus, ethics-unfriendly environments can be treated as contexts where general trends on students’ ethical attitudes are also clearly visible. This fact, together with the evidenced impact of ethics courses on students’ ethical inclinations, places ethics-unfriendly environments as crucial research settings for further inquiring into the nuances that help explain students’ attitudes towards accounting ethics and the role of ethics courses in business degree curricula.
For more details see: Guillermina Tormo-Carbó, Elies Seguí-Mas & Victor Oltra. 2016. Accounting Ethics in Unfriendly Environments: The Educational Challenge.
Journal of Business Ethics, 135(1), 161-175.