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The article chosen for the critique is titled, The Stocks at Stake: Return and Risk in Socially Responsible Investment, and is authored by Galema, et.al (2008). They begin with an introduction to what socially responsible investment or SRI is, and informs the reader that 10% of the US investments are carried out accordingly. In the market, there are those industries that employ SRI, while others are socially irresponsible, and their turn-over have many times been compared before, in certain studies undertaken. In this article, we have been enlightened to what errors have been made by previous studies that have resulted in lower returns compared to what was expected.
The authors have stated in the paper, that if an investor employs SRI in business, it may affect the return they attain upon investment. This is a piece of good and worthwhile information to all readers who are vested in putting their money into entrepreneurship. They can execute SRI to get maximum gains in their business transactions. SRI has been shown to produce demand differences in SRI and non-SRI stocks, therefore, employment of SRI and its advantages have been studied in this write-up.
Firstly the background of SRI, by various studies carried out by researchers, in favor of and against the system, has been given. All the research studies previously carried out show that the SRI stocks are overpriced because of the increased demand, and the non-SRI stocks are underpriced, due to their low demand. This is again good research undertaken by these authors themselves and indicates how the SRI and turn-over are proportional to one another (Galema, et.al. 2008).
The data that has been collected for this study has been from two renowned databases, one is the KLD Research & Analytics, Inc. for social responsibility, and the second from Data-stream, which pertains to the performance. The advantage of using the KLD is that it includes both positive and negative screens (strengths and weaknesses) in its evaluations, which are renewed annually, providing the latest and most authentic information possible. The analysis carried out does not include the information related to the screens linked to harmful substances such as alcohol, tobacco, etc., and human rights, since the latter was initiated at a later period, which would lead to lesser observations in the study. Hence, only particular screen aspects have been included, which is good enough for evaluation.
The return and accounting data obtained from the Data-stream were affecting the KLD scores; these were assessed by undertaking the SRI portfolios, the Fama-MacBeth regressions, and the pooled book-to-market regressions. After these analyses and the results obtained, further analyses were carried out to ensure that the outcome obtained is as bona fide as possible, with a variation in the portfolio regression returns, and in the book-to-market regressions. All the readings of the returns attained through these research tools have shown, proved, and indicated a significant effect of SRI on stock returns.
Thus the study conducted by Galema, Plantinga, and Scholtens is an influential and convincing approach to indicate the importance of socially responsible investment on the returns of a business setup. The methods employed to gain the results and then reconfirming them through additional analyses, leave no room for a second thought about the magnitude of SRI in the corporate world of today.
Works Cited
Galema, R., Plantinga, A., & Scholtens, B. (2008). The Stocks at Stake: Return and Risk in Socially Responsible Investment. Journal of Banking & Finance 32 2646-2654.
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