Chendi Zhang

Socially Responsible Investments: Methodology, Risk Exposure and Performance

This paper surveys the literature on socially responsible investments (SRI). Over the past decade, SRI has experienced an explosive growth around the world. Particular to the SRI funds is that both financial goals and social objectives are pursued. While corporate social responsibility (CSR) - defined as good corporate governance, sound environmental standards, and good management towards stakeholder relations - may create value for shareholders, participating in other social and ethical issues is likely to destroy shareholder value. Furthermore, the risk-adjusted returns of SRI funds in the US and UK are not significantly different from those of conventional funds, whereas SRI funds in Continental Europe and Asia-Pacific strongly underperform benchmark portfolios. Finally, the volatility of money-flows is lower in SRI funds than of conventional funds, and SRI investors’ decisions to invest in an SRI fund are less affected by management fees than the decisions by conventional fund investors.

The Price of Ethics: Evidence from Socially Responsible Mutual Funds

This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds’ riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.

Credit information quality and corporate debt maturity : theory and evidence

This paper provides new theoretical and empirical evidence suggesting that the quality of credit information may be a key element in explaining the maturity structure of corporate debt around the world. In markets with poor credit information and hence a high degree of uncertainty about borrower quality, the authors find suboptimal equilibria in which short-term contracts are preferred either as a hedge against uncertainty to limit losses in bad states (in the symmetric information case) or as a screening device to learn about borrower credit quality in the course of a repeated lending relationship (in the asymmetric information case). The results of the model are supported by the econometric analysis of panel data from both industrial and developing economies. The authors find that countries with better quality of credit information (for example, as a result of improvements in credit reporting systems or accounting standards) are characterized by a higher share of long-term debt as a proportion of total corporate debt ceteris paribus. The findings suggest that promoting institutions and policies to improve the quality of credit information is an important prerequisite for increasing access of firms to long-term finance.

Short-term Corporate Debt Around The World

Short-term corporate debt as a proportion of total debt issued by public firms varies greatly across countries, between 28% in the U.S. and 78% in China. This paper argues that the interaction between information asymmetry and legal protection of creditors is an important determinant of debt maturity. When short-term debt plays a dual role as signalling and commitment devices, a reduction in information asymmetry has a larger impact on debt maturity when creditor rights are weaker. We find empirical support for this prediction using firm-level data from 45 countries around the world.

A Direct Test of the Dividend Catering Hypothesis

This paper uses a direct measure of investors’ time-varying preference for dividends to test the dividend catering hypothesis proposed in Baker and Wurgler (2004a, 2004b). Specifically, we use Internet search volume for dividend-related keywords as a direct measure of investor preference for dividends (i.e., dividend sentiment). We validate this measure by showing that mutual funds that pay high dividends receive more inflows when the dividend sentiment is stronger. Further, we find that firms initiate or increase dividends when the dividend sentiment is stronger. These effects are concentrated among firms located in states with high dividend sentiment. Differences in risk or other firm characteristics do not explain our findings. Collectively, these results provide support for the catering theory and show that managers cater to investors’ time-varying demand for dividends. JEL classification: G32; G35.

Short Selling Before Initial Public Offerings

This paper shows that the presence of security lending supply before an initial public offering (IPO) reduces the initial stock return following IPO and improves subsequent long-run performance. We use a sample of British firms that go public via a two-stage IPO procedure where a firm becomes publicly traded on the London Stock Exchange in the first stage, and offers new shares to the public in the second stage. Stocks are lendable before the new equity issuance which relaxes the short-sale constraints that investors typically face in a conventional IPO. We find that two-stage offerings with higher security lending supply before offering are associated with lower IPO underpricing and better long-run performance. Our results are consistent with the conjecture that short selling improves the pricing efficiency of the IPO market.