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The liquidity, performance and investor preference of socially responsible investments

Jennifer Brodmann (Department of Accounting, Finance, Economics, and Law, California State University Dominguez Hills, Carson, California, USA)
Phuvadon Wuthisatian (Department of Business and Economics, Hastings College, Hastings, Nebraska, USA)
Rama K. Malladi (Department of Accounting, Finance, Economics, and Law, California State University Dominguez Hills, Carson, California, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 17 December 2021

Issue publication date: 14 March 2023

514

Abstract

Purpose

The purpose of the paper is to analyze socially responsible investment (SRI) asset performance compared to traditional assets using the MSCI KLD 400 Index. The authors examine the required return that investors expect to maintain their holdings in SRI stock and whether SRI stocks can be used for diversification during financial crises.

Design/methodology/approach

The authors examine SRI stocks' liquidity from the MSCI KLD 400 index, encompassing all environmental, social and governance (ESG) factor investments over 25 years, from 1990 until 2019. The authors test whether sorting portfolios based on their excess return, liquidity and volatility can explain the difference in SRI and non-SRI stocks' returns and then examine the global financial crisis' (GFC) impact on excess returns for SRI and non-SRI assets.

Findings

The authors find a significant difference in liquidity and volatility between SRI and non-SRI stocks and that SRI stocks perform better during financial crises. The results suggest a possible general investor preference to invest in non-SRI stocks despite our findings that SRI stocks tend to withstand financial risk better than non-SRI stocks. The authors find that long-term investors may be willing to forego short-term gains to reduce their overall risk exposure during crises.

Originality/value

SRI is gaining international popularity as an alternative investment that includes ratings based on ESG factors. Previous studies provide mixed results of whether SRI stocks outperform conventional stocks. In addition, there is limited research examining the liquidity and volatility of SRI assets. The authors compare the differences between SRI and non-SRI stocks in terms of excess return, volatility and liquidity and compare the liquidity of SRI and non-SRI stocks during the financial crisis.

Keywords

Acknowledgements

The authors want to thank our discussant and the participants in the Academy of Economics and Finance Conference and the discussant and participants in the Southwestern Finance Association Conference for their insight and feedback in improving this paper.

Citation

Brodmann, J., Wuthisatian, P. and Malladi, R.K. (2023), "The liquidity, performance and investor preference of socially responsible investments", Review of Behavioral Finance, Vol. 15 No. 2, pp. 224-239. https://doi.org/10.1108/RBF-09-2021-0191

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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