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Socially Responsible Investing - Cerulli Associates - Existing Literature in the Field of SRI in the UK - Research Assessment Answer
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Socially Responsible Investing Research Assessment Answer
Assignment Task: In recent years, the adoption of socially responsible investing (SRI) criteria has increased dramatically. Currently, around 18 percent of assets under management in the United States (US) monitored by Cerulli Associates are invested according to ethical criteria (SIF, 2014). SRI has a long history in the United Kingdom (UK), where the church took into account ethical constraints as early as 1948 (Sparkes, 2001). More importantly, in the UK the interest in SRI increased considerably due to regulation taking effect in 2000, obliging private sector pension funds to take SRI and their voting rights into account for their policy (A. L. Friedman & Miles, 2001). While these measures did not force funds to include SRI, this indicated a clear trend towards more ethical investing. Even though the adoption of SRI criteria increases steadily, it remains unclear if the inclusion of non-financial criteria into the investment selection process impacts investment performance. Clearly this question is important for investors and companies alike. Professional money managers have a fiduciary duty to their investors and hence, adopting ethical screens is complicated if it compromises returns. Similarly, as companies have an obligation to maximize profit, introducing measures that are more sustainable but reduce shareholder’s profit might be difficult to justify (M. Friedman, 1970). While there is a substantial amount of literature attempting to answer whether SRI affects returns in the UK market, most studies focus on two main assessment methods. The first strand of literature measures the performance of SRI mutual funds relative to matched conventional mutual funds. Unfortunately, this method is problematic in the matter that the performance of the mutual funds cannot be separated from the fund managers. Therefore, it cannot be assessed whether the performance of ethic funds is influenced by the focus on nonfinancial criteria or is solely based on the manager’s skill (Kempf & Osthoff, 2007). The second strand of literature examines the performance of socially screened portfolios. However, most studies only focus on an environmental screen although, in reality, most investors utilize a multitude of criteria including employee relations, diversity, corporate governance and community (Kempf & Osthoff, 2007). Furthermore, the latest data examined by research only ranges until 2007, meaning that the results of such funds is not observed in the post-crisis environment. The purpose of this paper is to investigate the performance of a socially screened portfolio by trying to reproduce Kempf and Osthoff (2007) analysis in the UK market according to economic, environmental, social, and corporate governance criteria in the period ranging from 2009 until 2015. This paper is organized as follows. First, the existing literature in the field of SRI in the UK is reviewed to gain some understanding of the current state of the research and the context of the study. Second, the research design is discussed in depth. Third, the results of the data analysis are shown and a discussion of these results follows in the next section. Fourth and last, a conclusion is drawn based on the results obtained. The research question that will be investigated in the paper will be whether insiders earn positive alpha returns in the market. This will be tested on a twelve and three month horizon. The following four hypothesizes will be tested: Hypothesis 1a: Following a buy by an insider the stock bought will outperform the market over the following twelve months. Hypothesis 1b: Following a buy by an insider the stock bought will outperform the market over the following three months. Hypothesis 2a: Following a sale by an insider the stock sold will underperform compared to the market over the following twelve months. Hypothesis 2b: Following a sale by an insider the stock sold will underperform compared to the market over the following three months. The reason why this time horizon was chosen was to test whether an insider trade can be expected to revel valuable private information on the company’s fundamentals and hence the future performance of the stock. The analysis has been based on stocks traded at Nasdaq OMX Nordic. The stocks included in the analysis have been stocks included in the Danish C20 index at April 1st 2010. The time period analyzed is from April 1st 2005-April 1st 2010. The underlying dataset used to create this analysis had previously not been created by others. I created the dataset used for this paper by manually reading through all filings to the Nasdaq OMX Nordic including information on insider trades or holdings of insiders.1 In total 4007 filings were read. In the analysis 601 insider trades will be investigated on a risk-adjusted basis.This Research Assessment has been solved by our Research experts at onlineassignmentbank. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.