The role of media reported weather shocks on mutual
fund capital flow:
A comparison of socially responsible- and conventional funds
Tefera, Bizuayehu Tsegaye 2020-06-05
Department of Business Administration Master’s Program in Finance
Identifying factors that affect the flow of mutual fund capital and between mutual fund types has the potential, among others, to relief fund management and investors from unnecessary administrative costs. This study investigated the role media reported weather shocks have on socially responsible and conventional mutual trust funds’ capital flow. The study also has compared the magnitude of influence media reported weather shocks has on capital flow between socially responsible- and convectional mutual trust funds. It gives conclusion after empirically studying all accessible socially responsible mutual trust funds with relevant accessible financial data, originated, and actively traded in the Swedish financial market with the Swedish currency (Kronor) as well as taking conventional mutual trust funds with similar maturity. And, the study result shows that media reported weather shocks has statistically significant role in the flow of capital, on both socially responsible- and conventional mutual funds in Sweden. It also shows that there is no significant difference in the role media reported weather shocks play between the two fund types. The result is concurrent with Hirshleifer & Shumway (2003)’s study which indicate that weather affecting investors mood and behavior. The result is interesting as it implicates to the psychological and emotional factors playing a significant role in affecting the flow of investment capital in general, in contrast to the rational economic behavior characterized by fund return and risk performance.
This study is supervised by Jörgen Hellström and from the start of this thesis project Jörgen has provided valuable information and guidance in areas of relevant related studies on the topic. Without his guidance the study process would have been more challenging. Fortunately, being advised to adjust the study’s scope as well as the domain together with information on different Swedish institutions related to the financial sector, has been valuable learning process. For his help, I thank Jörgen Hellström.
1 Introduction ... 1
1.1 Problem background ... 2
1.1.1 The Swedish investment cultural environment ... 3
1.1.2 Socially responsible investment challenges ... 4
1.2 Research gap and research question ... 5
1.3 The purpose of the study ... 7
1.4 Delimitation ... 8
2 Scientific Methodology... 9
2.1 Fundamental Assumptions ... 9
2.1.1 Ontological stances ... 9
2.1.2 Epistemological stances ... 10
2.1.3 Paradigms of a system of beliefs and practices ... 11
2.1.4 Axiology ... 12
2.2 Research Approach ... 12
2.3 Method ... 13
2.4 Secondary data and literature source ... 14
2.5 Research strategy and design ... 14
3 Literature review ... 17
3.1 Theoretical point of departure ... 24
3.1.1 Classical economic theories and past performance dependency of investments ... 24
3.1.2 Behavioral finance and factors shaping SR Investment desire ... 26
3.1.2 Investors orientation under high and low risk financial market ... 30
3.2 Hypothesis formation ... 32
4. Practical method ... 34
4.1 Financial data collection ... 34
4.1.1 Financial data input ... 35
4.2 Weather data ... 48
4.2.1 Weather data input, refined search results ... 51
4.3 Emphatical representation of variables and relationships ... 53
4.5 Data input control before the analysis ... 58
5. Data analysis and result ... 60
5.1 Initial multiple regression result ... 60
5.1.1 Robustness test on the initial regression result ... 64
5.2 Regression limiting extreme outliers (value greater than 2 and less than -2) ... 65
5.2.1 Robustness test of results found limiting extreme outliers ... 68
5.3 Result ... 69
6. Conclusion ... 71
6.1 Recommendation for future related study ... 71
6.2 The studies contribution and implication ... 72
6.2.1 Theoretical contribution ... 72
6.2.2 Practical contribution ... 72
6.2.3 Societal implication ... 72
6.3 The studies limitations ... 73
6.4 Quality criteria in quantitative study ... 74
6.4.1 Reliability ... 74
6.4.2 Validity ... 74
6.4.3 Generalizability ... 74
List of tables Table 1. Number of socially responsible funds that are eligible and included in the study, selected samples, as well as those that are excluded from the study. ... 35
Table 2. Total number of mutual fund samples. ... 36
Table 3. Socially responsible funds that have ten and more years of maturity. ... 37
Table 4. Number of socially responsible funds that have ten- and more years of maturity, under the management of their respective fund managing institution. ... 37
Table 5. Socially responsible funds that have eight to two and a quarter year of maturity. 39 Table 6. Number of socially responsible funds that have eight to two and a quarter year of maturity, under the management of their respective fund managing institution... 39
Table 7. Socially responsible funds that have two and less than two year of maturity. ... 41
Table 8. Number of socially responsible funds that have two and less than two year of maturity, under the management of their respective fund managing institution... 41
Table 10. Number of conventional funds that have ten- and more years of maturity, under
the management of their respective fund managing institution. ... 43
Table 11. Conventional funds that have nine to two and a quarter year of maturity. ... 44
Table 12. Number of conventional funds that have nine to two and a quarter year of maturity, under the management of their respective fund managing institution... 44
Table 13. Conventional funds that have two and less than two year of maturity. ... 46
Table 14. Number of conventional funds that have two and less than two year of maturity, under the management of their respective fund managing institution. ... 46
Table 15. Preliminary review with the search word ‘’Exteremet väder’’, sources and number of reports found. ... 49
Table 16. Preliminarily review with the search word ‘’SMHI, klass 3 värningar’’, sources and the number of reports found. ... 49
Table 17. Preliminarily review with the search word ‘’Skogsbränder’’, sources and number of reports found. ... 50
Table 18. Total observations from each of the fund types under study. ... 58
Table 19. Total observations for each of the variables under study... 58
Table 20. Multicollinearity test of the variables including dummy variables ... 59
Table 21. Multicollinearity test of the variables excluding dummy variables ... 59
Table 22. Initial multiple regression result ... 60
Table 23. Breusch-pagan heteroskedasticity test on the initial regression result ... 62
Table 24. White’s heteroskedasticity test n the initial regression result ... 63
Table 25. Robustness test on the initial regression result ... 64
Table 26. Regression result limiting extreme outliers ... 65
Table 27. Breusch-pagan heteroskedasticity test on the regression result limiting extreme outliers ... 67
Table 28. White’s heteroskedasticity test limiting extreme outliers ... 67
Table 29. Robustness test of results found limiting extreme outliers ... 68
List of figures Figure 1. The study design depicting data collection process. ... 15
Figure 2. The study design depicting the process taken to reach on the study’s result and conclusion. ... 16
Figure 3. Percentage of socially responsible funds under study and that are excluded. ... 36
Figure 4. Percentage of SRIF and conventional funds in the total mutual funds sample size. ... 36
Figure 5. Percentage of socially responsible funds that have ten- and more years of maturity, under the management of their respective fund managing institution... 38
Figure 6. Percentage of socially responsible funds that have eight to two and a quarter year of maturity, under the management of their respective fund managing institution. ... 40
Figure 8. Percentage of conventional funds that have ten- and more years of maturity,
under the management of their respective fund managing institution. ... 43
Figure 9. Percentage of conventional funds that have nine to two and a quarter year of maturity, under the management of their respective fund managing institution... 45
Figure 10. Percentage of conventional funds that have two and less than two year of maturity, under the management of their respective fund managing institution... 47
List of appendices Appendix 1. SRIF convenient population ... 80
Appendix 2. SRIF excluded from the convenient sample size due to lack of full data ... 82
Appendix 3. A histogram of capital flow observation distribution without excluding extreme outliers. ... 82
Appendix 4. A histogram of capital flow observation distribution excluding extreme outliers. ... 83
Appendix 5. A histogram of price index observation distribution. ... 83
Appendix 6. A histogram of historical beta observation distribution. ... 84
Appendix 7. A histogram of market risk level (OMXS30, S.D) observation distribution. . 84
Appendix 8. A histogram of weather shocks observation distribution. ... 85
Appendix 9. Scatter plots of capital flow ... 85
Appendix 10. A scatter plot of price index ... 86
Appendix 11. A scatter plot of historical beta ... 86
Appendix 12. A scatter plot of market risk level (OMXS30, S.D) ... 87
Key words and Acronyms
CAPM: CAPM is an abbreviation or acronym for Capital Asset Pricing Model
Climate: Climate is a long term and sessional meteorological state
Class 3 warning: ‘’Refers to very extreme weather which can mean severe danger or
hazard to the public and substantially big disturbance of key public infrastructures’’ translated form SMHI cited in Svenska Dagbladet, September 20, 2018,)
Capital flow: Capital flow is, in this study, the change in total net asset excluding return. It is an inference for the net capital that either flows in- or out of mutual trust funds.
ESG: ESG is an abbreviation or acronym for Environmental, Social and Governance.
Extreme Weather: ‘’Extreme weather is a weather event such as snow, rain, drought,
flood, or storm that is rare for the place where it occurs’’ (Encyclopedia, n.d,).
Mutual trust funds: Refers to capitals that are managed on the behalf of the investor by
the fund management. The net return on investment paid back to the investor without holding for further future reinvestment (Investopedia, n.d.)
SR: SR is an abbreviation or acronym for socially responsible
SRI: SRI is an abbreviation or acronym socially responsible investment
SRIF: SRIF is an abbreviation or acronym socially responsible investment fund. All funds with the name sustainable, sustainability, sustainability fund, green, ethic, ethical as well as climate and environment and environment friendly are regarded as socially responsible funds in this study.
Weather: Weather is a short term usually hours or days meteorological state.
Like other business operations, the success of mutual trust fund management is increasingly dependent on cost reduction and administrative efficiency Bollen (2007). For this reason, financial service providers relay on the identification of investment risks and risk factors that may result in significant costs. Today’s financial institutions are highly dependent on identifying current issues that are popular in their product market to assess treats and opportunities. Identifiable production and consumption pattern in their domain market offer financial institutions an understanding of their customers behavior and better adapt to new challenges that might potentially come out to be costly.
Extreme weather events, on the other hand, are one of the risks identified by World Economic Forum’s global risk report as the challenge’s humankind faces (Global Risks, 2015, cited in Van der Vegt, Essens, Wahlström & George, 2015, p. 1). Dependency on fossil fuels as energy source and the exhaustive land use accelerates the greenhouse effect (Howard-Grenville, Buckle, Hoskins & George, 2014, p. 3). Such activities contribute to the increase in greenhouse gasses for example carbon dioxide and methane, which can prevent more and more heat energy coming from the sun leaving earth (Howard-Grenville et al., 2014, p. 3). This results in a rise in global temperature and variability in natural climate causing weather shocks (Howard-Grenville et al., 2014, p. 4). One of the objectives the Global sustainable development goal for 2030 identified by the UN (UN, nd,) is to prevent the impact of greenhouse effect through, among others, the control of heat absorbing gasses from being released into the atmosphere. The sustainable development goal setting and the subsequent regulative measures taken by nations, including Sweden, shapes the alignment of business goals with social responsibility objectives around the globe (Herremans & Nazari, 2016, p. 104). In addition, such goal setting and subsequent informative actions taken have substantial impact in creating awareness among ordinary members of a society about the challenged faced by climate change, extreme weather, and related incidents.
1.1 Problem background
‘’SRI builds on the idea that there are good and bad parts of today’s corporate sector.’’ (Cowton & Sandbery, 2012, P. 144). And, it is, generally assumed as a mechanism by which capital owner and investors do good to the society through the market system (Boettke & Sautet, 2011, p.1). However, the notion of characterizing an act or social act as good or bad is a source of debate by itself (O’Neil & Pienta, 1994, p. 71). O’Neil & Pienta (1994) assert how challenging it might be determining ‘’what are the good and right things to do’’ and argues that this limits individuals’ motive and courage to act according to their judgment on what is good and right. Perhaps the significant emphasis O’Neil & Pienta (1994) given in this regard is the difference in implication between ‘’what is good and band’’ and ‘’ what is right and wrong’’. ‘’Good and Band’’ referring to taking or not taking advantages to oneself and centers around self-interest (O’Neil & Pienta, 1994, p. 74). While ‘’Right and Wrong’’ referring to respecting and not respecting others when taking advantages in one’s favor and is considerate about others interest (O’Neil & Pienta, 1994, p. 74). This is referred as orientation and by drawing similar analogy, investors orientation towards others is expressed through the integration of Environmental, Social and Governance (ESG) factors when taking economic advantages. Despite the generality of where the characterization of good and bad as well as wright and wrong can be applied, ever, the main focuses of the growing interest in socially responsible investment rests on environmental concern, especially climate change (Eurosif, 2016). And, the subsequent determination of what is right and wrong for the environment seem not to be a challenge with the magnitude that O’Neil & Pienta pointed. Rather, the dominance of the climate and weather-related concerns in the mainstream media should be considered informative on what is good and right to do for the natural environment. It may, accordingly, be considered such awareness creation efforts has helped the ever-growing prevalence of socially responsible investment alternatives in the financial market.
1.1.1 The Swedish investment cultural environment
Generally, one of the two major reason for describing the current over-all state of socially responsible investment is a growing concern for the environment (Cowton & Sandbery 2012, p. 144). This growing concern for the environment has begun to be institutionalized and one example is the European Union’s the zero greenhouse gasses emissions goal by the year 2050 (Euroif,2016). More so, in 2015 at the Paris agreement, the major actors in the global carbon emission has also reach an agreement to collaborate in an effort towards solving the challenge faced by the world climate change (UN, n.d,). The development trend of the SRI in the Nordic countries, specifically Denmark, Norway and Sweden, however, seems to coincide with the occurrence of socially irresponsible behavior by corporations and exemplary ‘'incidents seem to have acted as a catalyst for the development of responsible investing’’ (Bengtsson, 2008b; Kreander, 2001, cited in Scholtens & Sievänen, 2013, P.609). However, if those incidents include also extreme weather and weather shocks, among others, is not identified.
As member of the European Union, Sweden has adopted EU’s zero greenhouse gasses emissions goal by the year 2050 (Eurosif, 2016) and has adopted the 17 Global sustainable development goal initiatives set by the UN (UN, nd). However, despite the political initiative and the relatively long history of SRI market, Sweden has no legal framework that govern SRI market (Eurosif, 2016). And, the development of SRI in Sweden and the Nordic countries in general, might be shaped by institutions and non-governmental organizations (Bengtsson, 2008b, cited in (Scholtens & Sievänen, 2013, P.609). Thus, it is common for large institutional investors to have a guiding principle or policy related to investment activity in a socially responsible manner (Eurosif, 2016). ‘’SRI in Sweden already started in the 1960s, when the first ethical fund was established and it can be regarded as a pioneer in providing ethical private investor funds’’ (Scholtens & Sievänen, 2013, P.609). A probable explanatory reason given for the trend of leniency towards dependency on guiding principles rather than legal framework in Sweden might, therefore, be that significant number of investors and investment service providers in Sweden has for more than a decade been engaged in socially responsible investment market in the country (Eurosif, 2016) and this might have given the authorities a sense of trust and low risk exposure in relation to socially irresponsible investments.
1.1.2 Socially responsible investment challenges
There are critical challenges that faces SRI in comparison to conventional mutual funds. For example, one of the most prevalent is the non-existence of universally agreed up on criteria for the evaluation of what is socially responsible act or not (Cowton & Sandbery, 2012, P. 144). Which contributes to a greater extent for the lack of performance measurement- and indicators, as well as for the marking or cataloguing of investments as socially responsible (SR) with a well identified and defining behavior. This is attributed to the existence of large variety of social responsibility that depends on the geographical location and cultural settings of the funds. Social responsibility reporting currently is usually performed without an underling accounting system that continuously records and updates information; therefore, only limited assurance can be given (Fagerström, et al., 2017, P. 46). Which constitutes social responsibility reports lack of comparison mechanism that can assess performance over time and among companies (Fagerström, et al. 2017, P. 46). The nonattendance of systematic approach to prepare social responsibility performance reports, might have caused institutions to be motivated to project a positive image of their efforts regarding social responsibility (Fagerström, et al., 2017, P. 46). Therefore, one of the challenges is lack of performance indicators which makes it challenging for management control and makes assessment and follow ups on the development trend of SR not feasible. This prevents progressive improvements from taking place in areas, for example, product development, technological innovations that could support easy accessibility and availability of a wide variety of SRI opportunities. The second challenge is the absence of commonly used identification criteria. The terms ethical investment, socially responsible investments sustainable, sustainability, sustainability fund, green, ethic, ethical as well as climate and environment and environment friendly are used interchangeably. Although, depending on the location some of the terms may persist (Cowton & Sandbery, 2012, P. 142). With the identification of some funds with those terms might lead to the assumption that fund that are not labeled with those names, or conventional funds, as ‘’antisocial or irresponsible’’ (Cowton & Sandbery, 2012, P. 142). The third main challenge is related to the existence of a large variety of social responsibilities. Which makes how investors react to factors affecting non-financial performance or social responsibility performance, currently, a widely debated topic (Cowton & Sandbery, 2012, P. 14). In both the financial and non-financial motive, the central issue is behavioral and on how people react to external factors. Although, they differ in the variety and articulation of the motives that initiates investors reaction to each category. While, on the other hand, understanding the rational economic motive of investors may be eased by having reliable information on the financial performance of the mutual trust funds.
1.2 Research gap and research question
Contrarily to conventional investment, SRI funds are not expected to be sensitive to past financial performance. This infers that investment in socially responsible funds grow steadily rather than showing a sudden fluctuation regardless of financial performance, thus, this growth of investments in SRF to be consistent and unaffected by past as well as expected future financial performance (Renneboog et al., 2008, p. 1725). Therefore, the potential impact of incidents such as weather shocks on such an assumed stable SRI Capital flow is not addressed and documented yet. Most of those previous studies on SRI, thus, focused on testing if the concept of low magnitude of sensitivity to past financial performance dependency for socially Responsible funds, in contrary to Conventional funds, holds true or not. The studies identified and that compared SRIF and Conventional funds, has taken the quality criteria of conventional investments, i.e. return, and thus portfolio theory and CAPM model as a base for defining the behavior of conventional fund as past-performance dependent. Those studies, on the other hand, considered SRI funds have additional quality criteria, i.e. ESG, and thus is not guided by portfolio theory and CAPM model. Rather, SRIF should show a consistent growth regardless of past performance.
Examples of such studies are Renneboog, et al. (2008)’s past-performance dependence concept as well as Nofsinger &Varma (2014)’s concept of the impact the general market condition has on SRI and conventional fund performance which indicates the effect the general market condition could have on capital flow. Those are also some of the studies which are the starting reference or what constitutes the theoretical framework for this study. Although, since socially responsible investments have additional screening criteria’s, which are related to environmental, social and governance (ESG) values, classical economic variables alone may not be complete enough to describe how SRIF behaves in a certain financial market. Addressing this gap, Lopez-Arceiz, et al. (2018)’s and Renneboog, (2011)’s study on the impact cultural environment’s has on the socially responsible investment funds, are the studies that investigated both fund types taking variable other than classical economic variable as an explanatory variables or a factor affecting how SRIF behaves in comparison to conventional fund. Those studies are in line with Bollen (2007)’s study which is based on the possibility for both financial and non-financial utilities affecting investment funds. Additional variety of non-neoclassical economic variables as explanation for the behavior of socially responsible investments is Tippet &Leung (2001, p. 51)’s study, which shows that gender-based difference in utility preference. Gender the share of each gender in the investors pool is one potential factor affecting how capital flows in and out of a fund.
the financial market and study the impact of weather-related incidents on how capital flows in and out of socially responsible investment funds would hardly lead to success.
Recently, attempts to bring and place such non-financial performance in the platform, where financial performances are publicly evaluated, are being made to make investments more sensitive to incidents related to social responsibility as well. Currently, such an effort mostly known with the term ‘’ESG integration’’ (Willem, 2016). However, since the development of ‘’ESG integration’’ is in its infancy, studies on investments sensitivity to different dimensions or variables of social responsibilities need to be encouraged. climate and weather related socially responsible investment is barely studied (Riikka Sievänen, 2013, p.207). Accordingly, the relation between extreme weather and capital flow is not yet empirically well-established or the studies are limited to support informed financial decision making for both business and individual investors (Cowton & Sandbery, 2012, P. 142).
Whether weather shock motivates investors to choose moving in to -and out their capital of investment fund type is the most relevant information for decision making. As Bollen (2007, 685,) addressed it, managing capital flow (capital in-and out flow) might be costly business activity and understanding how capital flows in relation to weather shocks can be considered as a key administrative efficiency measure. For investors, on the other hand, rational economic- and emotional human behavior that weather shocks can be associated with could be relevant in satisfying their investment needs. Consequently, it is relevant to investigate, whether weathers shocks create the desire to participate in solving environmental problem, thus, have utility.
The growing offer in socially responsible teamed investment choices by financial service providers may indicate the existence of a growing demand for SRIF (Bollen, 2007, 683). Hence, the relevance lays on understanding capital owner investment decision making behavior, which is choose either to- or not to invest in- and withdraw from business activities that does not take into consideration social responsibility or to selectively invest in business that are engaged in socially responsible business activities. The relationship between weather shocks and Capital flow is, however, not yet empirically well-established or the studies are limited to support informed financial decision making for both business and individual investors (Cowton & Sandbery (2012). P. 142). Accordingly, studying the relationship between extreme weather, in this case weather shocks and investment found movements could full fill an important role in practical business and organizational environment as well as for the academic filed. For this reason, it is desirable to contribute towards the standardization of SRI and strengthen the possibility of doing so despite its heterogeneity (Sandbery & et al., 2009, p. 519). This study attempts to address this gab by doing a quantitative study on the sensitivity of funds to media reported weather shocks. Hence, the research question is formulated as follow.
1.3 The purpose of the study
Capital flow is, in this study, the words used to describe the periodical change in the amount of total net asset (TNA) a fund management has in comparison to the presiding period. And, it can be affected and be dependent on multiple factors such as the financial performance, which are return and risk level of the fund, the general market condition, the preference and desire of market participant as well as the dominate social values in a cultural environment. This study, further, attempts to identify whether one additional factor, which is weather shocks, can also affect the in and out flow of socially responsible mutual fund.
The purpose of the study, therefore, is to understand whether media reported weathers shocks create the desire to participate in solving environmental problem. In attempt to answer the question, investigating the relationship between weather shocks and SRI- as well as conventional funds’ capital flow is the convenient approach. Accordingly, capital flow is inferred from a change in the fund’s total net asset for a period since its volume is affected by the coming in- and going out of a capital. Weather related incidents that are associated to class three warning are categorized as weather shock in this study. Thus, the purpose is to observe whether there is a relationship between weather and capital flow of SR investments. It will also investigate whether such nature of relationship of SR mutual funds with weather shocks is similar for conventional mutual funds as well. To achieve this goal, three main variables, the market conditions and risk as well as past financial performance of the funds, will be studied simultaneously. Although, there is the possibility that capital flow can be influenced by a variety of other factors than weather shocks, there is also the possibility that its response to weather shock could be selective.
The scope of the study is limited to a few areas. For example, inclusivity of available study population, time frame and the variables chosen. The scope of the study is based on an already identified factors that can affect the in-and out flow of capital from and into a mutual fund. For example, financial performance, the general market condition, the preference, and desire of market participant as well as the dominant social values in a cultural environment. This study, further, attempts to identify whether one additional factor, which is weather shocks, can also affect the in and out flow of mutual funds’ capital. Therefore, it is delimited on studding the relationship between media reported weather shocks and capital flow. It also is limited to the type of relation weather shocks has with capital flow, not other implication it may have. For example, in relation to productivity and fatalities that weather shocks may cause. Subsequently, only the inclusion and exclusion investment strategies can be assumed while observing a change in the volume of funds under the management of fund managing institution.
The funds will, also, be studied in relation to only one dimension out of the multiple dimensions of social responsibility, that is weather shock which is under the umbrella of environmental stewardship. Though it considers cultural environment in the interpretation of the study result, it will not attempt to study the effect of individual demographic variables and educational background in mutual fund capital flow. In relation to the study population, the scope of the study is limited to analyzing all accessible socially responsible investment funds that meet the criteria for the study. Thus, including exhaustively all SRI funds that might be available is not the study’s objective. The period under study is, in addition, limited to a maximum of ten years with the intent to match the availability of both financial as well as media reported extreme weather incidents.
2 Scientific Methodology
This part of the study covers various concepts, assumptions, and theoretical bases of conducting a scientific study. It first coves philosophical terminologies and explains it to motivate the authors view and express the standpoints taken.
2.1 Fundamental Assumptions
The most common and widely discussed scientific study related assumptions in literatures are assumption on the nature of truth or reality which is identified as ontology in this study and the nature of knowledge which is identified as epistemology in this study as well as the nature of values which is also identified as axiology in this study. Those are discussed as follows.
2.1.1 Ontological stances
Ontological explanations help explain the nature of truth and reality and help the characterization of the metaphysical paradigms. Morgan (2007, p. 50) refers to the nature of reality or truth in terms of paradigms that represent different worldviews. Ontology, therefore, gives distinctively identifiable characteristics of the topic under consideration depending on the worldview assumed. Long (2000, p. 190), similarly, defines ontology as an assumption which is utilized in categorizing the characteristics or nature of ‘’social reality’’ or truth. By which he refers to two questions about the nature of reality on a topic. The first is, if reality exists independent of individuals, which is objective and constant. Such a claim to the nature of reality is represented by the positivist paradigm (Morgan, 2007, p. 49). Positivism is the term initially used to refer an optimistic attitude and belief that research questions can be answered with quantitative method thus indicating the dominance of a realistic worldview (Morgan, 2007, p. 49, 56 & 63). Scott (2005, p. 635) refers this world view as a model that describes how the world works with certainty or ‘’naïve realism’’. Or rather, the second, if the nature of social reality is dependent on individuals and subjected to cognitive ability, and therefore, subjective and variable (Long, 2000, p. 190). Paradigm of subjective world view was initiated as a counter to the positivist and associated to a claim that the nature of reality is characterized by subject dependability (Morgan, 2007, p. 49). Subjectivism is the term initially used to indicate that research questions can be answered with qualitative method (Morgan, 2007, p. 49, 56 & 63). Scott (2005, p. 635) also refers it as ‘’radical relativism’’. He described it as a reality that is only confined to an individual and not shared with others.
(2000) also discusses four possible variants of assumptions, in addition to the two extreme types of nature of truth in four different metaphors. The first, and the one which is relevant for this study of such, metaphors is ‘’The social world as an organism’’ which he describes it as objective and operates according to the natural law, yet it reacts and adapts to its surrounding (Long, 2000, p. 192). Thus, there exist causal relationships that can be studied even though those causal relationships are subject to gradual change rather than being constant or static (Long, 200, p. 192). In addition, Scott (2005, p. 635) have discussed alternative world views, which he refers ‘’critical realism’’. Critical realism assumes a world where, even though constricting a model certainly representative is not possible, its existence is shared by others, rather than being confined to an individual only (Scott, 2005, p. 635). The study believes there is reality in the variables created, which are the dependent and independent, and those variables are related to social behavior and it is possible to study each of those variables independent of the other. It also is possible to study how they behave when those variables come together. Therefore, this studies philosophy on the nature of truth or the nature of social reality is that even though the variables are considered to be studied are subjected to be affected by different factors it is believed that they still can be identified independently and causal relationships between those variables can be studied. In addition, a commonly shared worldview determines the things that are socially responsible or morally right in a social group (Morgan, 2007, p. 50). But a social group is not always purely homogeneous in worldviews thus what is considered socially responsible and morally justifiable could differ for some individuals. Therefore, though there exist objectively observable pattern in social reality the study requires a critical examination of exceptional view of social responsibility and morality. For this reason, this study will exclude cultural environment from empirical study rather will be dispensed with qualitative narration. Which is similar to ‘’The social world as an organism’’ metaphor of Long. Thus, the nature of truth about the study topic is ‘’critical realism’’.
2.1.2 Epistemological stances
be classified in between. The pragmatic paradigm is one such approach to address the issue of knowledge base and knowledge transfer (Morgan, 2007, p. 65-70).
The knowledge about economic variables addressed in this study can be found and observed objectively to all individuals without the interference of the values and personal experiences of the researcher. This enables conducting quantitative study and empirical test. However, knowledge about the behavioral and cultural environment explanations requires human interaction with larger group of individuals to identify certain similar patterns of behavior. Identifying such pattern is subject to the researcher’s cognitive ability and is variable from individual to individual. Such knowledge base necessitates a qualitative study and narration. Therefore, it is not feasible to claim any of the metaphysical stances in this study as those assumptions does not reflect the characteristics of the knowledge base of the study. Despite the stance taken, an attempt to study even the cultural environment could be made either empirically assuming the positivist side of metaphysical stance or qualitatively assuming a constructivism side of the metaphysical stance. The study rather, advocates for pragmatic paradigm and claims to have a ‘’critical positivism’’ knowledge base and way of sharing knowledge to others. This is because, even though the main variables of the study and the relationship between them can be supported with evidence, a full understanding of the nature of the topic and similarity on the degree of the understating of the topic among individuals is not guaranteed (Scott, 2005, p. 635). Accordingly, ‘’ a pragmatic approach would redirect our attention to investigating the factors that have the most impact on what we choose to study and how we choose to do so’’ (Morgan, 2007, p. 70).
2.1.3 Paradigms of a system of beliefs and practices
A system of shared beliefs and practices relates to the choice of study topic and the research approach to follow. It influences and shapes researcher’s way of selecting the research question and the process as well as methods used to answer the question (Morgan,2007, p. 49). Similarly, shared beliefs among members of a specialty area establishes a consensus about the relevance criteria on research questions (Morgan, 2007, p. 53). It dictates the validity of the procedures or methods followed in the process of answering the research question as well (Morgan, 2007, p. 53)
Axiology refers to a theory about value and help identify values that are in the favor of the society’s wellbeing (Biedenbach & Jacobsson, 2016, p. 140). More specifically, it is the concept used to refer the consideration given to ethical and moral corners in a social science research study (Morgan, 2007, p. 69). Basing some of the ethical considerations identified in Biedenbach & Jacobsson (2016), the proper use of material and physical value available at the university such as the Eikon database and other outside websites for example Morningstar need consideration. Information accessed through registering on Morningstar may not be used without the consent of the organization. The Universities computer where Eikon database can be used might be sought after by more than one student at a time. Communicating with others on the use of the computer is appropriate. However, there is no identified asset that its value could be affected in relation to the process of doing this study. The study’s data impute is accessed from databases that are accessible for the public at large. Therefore, concerns regarding damages on privacy, integrity, informed consent etc. are limited. In addition, regarding concerns for social value, data input on the social values and responsibilities related to the natural environment is planned to be from sources that are available to the public. Hence, the use of those data is not considered to be a concern for damage on social values. This applies also for political values, aesthetic value, religious value. On the other hand, regarding intellectual value, the ethical concern in doing this study is significantly related to the intellectual value since the main purpose of conducing such a study is to contribute to the society and the intellectual community through the expansion of the knowledgebase. Accordingly, the necessary procedures in doing a research study, from identifying and naming sources of information, acknowledging contribution of previous studies as well as verifiability of the study itself are responsibility being followed.
2.2 Research Approach
Method is about the connection between theory and data, as well as theory and practice, and inference from data (Morgan, 2007, p. 71). It is concerned with the steps to follow in the process of answering the research question rather than how the research is generally viewed. Long (2000, p. 194) refers it as an approach to investigation or general type of investigation. Thus, it guides which type of investigation is appropriate to which type of research based on the generality and contextuality of the knowledge to be generated (Morgan, 2007, p. 71). Accordioning, theory generation research is best if uses qualitative method, while if theory testing uses quantitative method (Anderson, 1983; & Deshpande, 1983, cited in Long, 2000, p.195). Hence, the use of one research approach for both theory testing and theory generation can cause problems in reliability and validity (Long, 2000, p.195). Researchers who favor the metaphysical paradigm advices that the research question should guide the research method to be used (Morgan, 2007, p. 64). However, there is a contrast between the requirement of metaphysical paradigm, which is to work only either in the realism or constructivism view of the nature of reality (Morgan, 2007, p. 64).
Despite the contrast, and although this study does not advocate for metaphysical paradigm, the research question will guide the choice of methods used. Subsequently, the research question suggests and helps identify the factors that can affect the concepts in the study. The research question to this study is ‘’What is the role of media reported weather shocks on mutual funds capital flow?’’. The research question, thus, indicates a study of relationship between weather shocks and found capital flow or causal relationship. This gives a clear indication in to the independent and dependent variables, i.e. weather shock indicators and socially responsible as well as conventional founds capital flow, consecutively. Model examples of research can also be considered as paradigms as they provide perspective and guidance in how to conduct research in a field of study (Morgan, 2007, p. 53 & 54), which he also points that such model studies have the potential to give examples of studies that used a combined methods, i.e. quantitative and qualitative.
2.4 Secondary data and literature source
The source of secondary data is Umeå University library. The library’s search engine was used to find relevant studies on the topic. While, most of the literatures are scientific publications, published and electronic books are also accessed to refer to the main theories and concepts. It is collected in the process of reviewing the related studies that has been done in the past. Thus, the collection process is the same as the process followed while reviewing those studies. Which is using the search words such as socially responsible versus conventional investments, socially responsible investment. Once, a few related articles have been found, further search was made following the reference lists identified in those previous studies. Some of the literatures are also reviewed based on the recommendation of the thesis supervisor.
2.5 Research strategy and design
Figure 1. The study design depicting data collection process.
Figure 2. The study design depicting the process taken to reach on the study’s result and conclusion.
3 Literature review
One of the factors affecting Capital flow is individual’s cognitive ability which is interpreted through the financial decision made. Which is according to Frydman & Camerer (2016, p. 661) one of the all the important decision’s individuals make. They point that cognitive reasons, and low financial literacy which could also be categorized as a sub-element of cognitive constraint, is the reason for inefficient financial decision making. Taking inefficiency in decision making as a non-optimal balance between risk and utility derived, both from financial and non-financial performance perspective, it relates more specifically to neuropsychological factors besides cognitive ability. In this regard, part of a human brain called anterior insula in interoceptio is associated with awareness of internal state of one’s body, emotion, and assessment of risk, prompting safer investment decision making (Frydman & Camerer, 2016, p. 666). Similarly, another brain part called VSt is associated with ‘’Expected-reward signals’’, hence, to risk taking in investment (Frydman & Camerer, 2016, p. 666). The prevalence difference, of those two neuro-psychological attributes of behavior, between individuals is explained by genetic differences among other things (Frydman & Camerer, 2016, p. 666). A study that closely investigated, the influence of psychological factors on economic variables is conducted by Hirshleifer & Shumway (2003) where they empirically studied the relation between sunshine and the return on stock market. Investors in a bad mood lean towards accessing unpleasant or negative substances out of their encounter (Isen et, al, 1978, and Forgas & Bower, 1987, cited in Hirshleifer & Shumway, 2003, p. 1012). Which their study result showed a strong relation between sunshine and the return on stock market (Hirshleifer & Shumway, 2003, p.1028). What this study differs from Hirshleifer & Shumway’s is that it focused ‘’shocks’’ rather than ‘’moods’’ related to weather and socially responsible funds rather than the stock market in general. Which may play a role in showing a different behavior in relation to weather and investment funds than what might be projected from their study.
Besides pure differences in psychological and cognitive ability, behaviors attributed to demographic differences in terms of age, gender as well as individual-parental relationship indicated by Hellström et.al. (2020) are the medium for the manifestation of the effect of the surrounding environment. This surrounding environment in our context is the cultural environment. The study is focused on the effect of groups behavior on fund movement, attempts has been made to understand how cultural environment stimulate ‘’Expected-reward signals’’ or consciousness to financial and non-financial risks. Thus, it can influence the intensity of capital flow of a certain type of the fund. Accordingly, in the following part the cultural environment and demographic variables will be discussed.
study result indicated gender-based difference, where the probability of female’s to be ethical investors is greater than that of for male, which concurs with Scholtens & Sievänen (2013) argument stating that socially responsible investments have more feminine values (Scholtens & Sievänen, 2013, p.612). Thus, in a society with more female investors it might be possible to observe a thriving socially investment market with more capital moving in to SRIF.
Cultural environment is also identified as a factor affecting how funds move. Cultural environment is explained in relation to religious believes and customs and leading to shape ethical values, moral guidance and shape the behavior of the mass population (Lopez-Arceiz et al., 2018, p. 262, and Renneboog et al., 2008, p. 1725). Thus, capital may flow into socially responsible investment funds in a location where cultural values are strong and financial institutions are able to offer financial products tailored to those values. To date, in the modern world, religious values are affecting the selection of funds, for example Pioneer Fund, which was established in the late 1930’s (Rosenthal, 1995, p.45), used religious traditions to screen investments (Renneboog et al., 2008, p. 1725), although the fund might be associated with the study of differences among humans. Accordingly, Lopez-Arceiz et al. (2018) tried to categorize the major cultural differences into two broad sets of cultural environments based on two prominent religious ideologies in the western world, the catholic and protestant. Lopez-Arceiz et al. (2018) discuss how the following two major cultural environments could affect the significance of the differences within SRI funds as well as with conventional funds.
Saxon cultural environment: Lopez-Arceiz et al. (2018) argue that funds in Anglo-Saxon cultural environment are likely to establish negative screening based on the specific preference criteria of a certain group in the portfolio composition (Lopez-Arceiz et al., 2018, p. 262). Even though their indication is related mainly to the context of social responsibility factors, the probability of financial performance criteria to be one besides the many variant of social responsibility (Lopez-Arceiz et al., 2018, p. 262).
Continental Europe cultural environment: They argue that in this cultural environment commonly shared values and principles are nurtured through investment in social projects and active engage from the investors side leading to a positive attitude wards social development and acceptance of such business activities, or positive screening. Further, these practices promoting and strengthen the values that are common in society (Lopez-Arceiz et al., 2018, p. 262). A supporting statement is pointed by Cortez et al., 2009, indicating the possibility of positive screening or social screening of European funds does not lead to financial underperformance (Cortez et al., 2009, p. 573 & 581).
hand, there could be many other factors that influences what is acceptable level of departure from ‘’moral or social responsibility’’ and what is not, in each cultural environment. In support of this idea (Jones et al., 2008, p. 182) discuss the difficulty attributed to the nonexistence of a pre-set all serving standard for the evaluation of socially responsible fund, which opens the opportunity for different level of ‘’moral intensity’’ associated with each investment fund (Jones et al., 2008, p. 182) in one cultural environment.
Culture and shared values develop through long period of time and may take several generations before a new one establishes in a society. Hence, the commonly shared moral values, social responsibility and ethical behavior is not expected to vary due to an occurrence of incidents in a cultural environment. However, a cultural environment could determine the intensity of decision taken in the society, whether it is ethical or socially responsible behavior. Consideration of the cultural environment in the study of how funds move (capital flows), therefore, gives a holistic understanding of the factors that are affecting investment fund movement, especially the behavior of socially responsible investment funds.
The most widely recognized factor affecting mutual fund’s flow of capital is probability the economic variables such as return and risk. The classical economic variables, such as risk and return, are what most of the finance academic literatures are established around. Accordingly, Milton Friedman’s theory of the role of business or profit maximization and Markowitz’s theory of portfolio as well as the Capital Asset Pricing Model (CAPM) are the most dominant while considering financial utility (Abbarno, 2001, & Lopez-Arceiz et al., 2018). The goal of profit maximization concept is used for institutions for a similar phrase used to refer to the behavior of value optimizing individual investor in Markowitz’s portfolio theory.
Capital is expected to flow or move into investment funds with superior performance than the competing funds based on the classical economic theory (Markowitz, 1991, p. 469 & 470,). The classification of comparison between SRI and Conventional funds in performance scale of under-, over-performance and no significant difference, is generalized due to the ‘’historical roots, the market development, the regulatory background, and the effect of investment screens/strategy used by SRI funds (Renneboog et al., 2008, p. 1724), methodologies used, sample size, difference in analysis periods, return estimation modelling framework and etc. differences (Jones et al., 2008, p. 181). However, while portfolio theory and CAPM tell the sensitive of conventional funds to past performance, Bollen (2007)’s study, on the other hand, shows that SRIF are more sensitive to past positive return and less sensitive to past negative return performance. This is due to the conventional investor’s rational economic behavior and they move their capital to SRIF when past performance is positive in attempt to either maximize the value of their capital or to gain additional utility from socially responsible investments (Bollen, 2007, p. 683 & 706).
performance, although they stated the nonexistence of indication on the statistical significance, of SR, where SR underperforms, and conventional investments. Which they consider the result to be contradicting previous studies that points to significant statistical differences between the investments. The second category of performance evaluation is, SR founds outperforming conventional founds in terms of profitability, are observed in (Lopez-Arceiz et al., 2018, p.265)’s study. And, in the third category of performance evaluation, no significant financial performance difference is supported by Cortez et al. (2009), who’s empirical study, on European funds, result indicated that the performance of SR funds is comparable to that of conventional funds (Cortez et al., 2009, 581 & 584). However, Lopez-Arceiz et al. (2018)’s study also indicate that when introducing the cultural environment factor of all the funds geographical location into the analysis, the result points to no difference between the two fund types in general (Lopez-Arceiz et al., 2018, p.266).
Capital is expected to flow or move into investment funds with superior performance than the competing funds based on the classical economic theory (Markowitz, 1991, p. 469 & 470,). According to Markowitz, however, the return performance of investments is not guaranteed, and this creates uncertainty or risk. ‘’Classic portfolio theory states that the specific risk of an investment will tend to decrease as the volume of financial assets held in the portfolio increases (Markowitz, 1952,), it would be reasonable to expect the performance of SRI funds to be lower than conventional funds‘’ (Lopez-Arceiz et al., 2018, p. 260). In similar logical argument Tippet and Leung (2001)’s study result, in relation to modern portfolio theory, indicates that socially responsible investors held smaller or less diversified portfolios than conventional investors (Tippet and Leung, 2001, p. 53), implying the exposure of SRI to higher risk than conventional funds. However, the findings of different empirical studies neither confirm nor reject collectively the theory. For example, (Lopez-Arceiz et al., 2018, p. 261)’s analysis of selected previous studies on the Risk and Return performance of SRF and conventional funds indicates that those studies have found strong differences between SRF and conventional funds when risk levels are identified and studied, but missed to indicate which one scored highest and which one have the lowest risks exposure. But, Lopez-Arceiz et al.’s own study indicates that SR funds shows lower risk/volatility in comparison to conventional Founds (Lopez-Arceiz et al., 2018, p.265), which is contrary to the expectation of classical portfolio theory. Bollen (2007)’s study result pointing that SRIF are more sensitive to past positive return and less sensitive to past negative return performance. Which might contribute SRIF to have less risk than conventional due to the reason that less funs (capital) is moving out of SRIF when return performance is inferior. This is due to the conventional investor’s rational economic behavior and they move their capital to SRIF when past performance is positive in attempt to either maximize the value of their capital or to gain additional utility from socially responsible investments (Bollen, 2007, p. 683 & 706), while the majority of SRI investors are reluctant to move out their capital from SRIF due to their orientation (values and loyalty). In general, concurrent with modern portfolio theory, socially responsible investments indicated to have less volatility than conventional investments (Bollen, 2007, and Renneboog et al., 2005, cited in Renneboog et al., 2008, p. 1724). However, this is due to a different reason than portfolio volume and diversity.
performances to evaluate investment funds. Subsequently, investments with superior performance than the competing funds in the past period may attract capital and their fund volume may move upward. However, the degree of sensitivity to past performance between different fund types, such as socially responsible funds and conventional funds, might be argued. McLachlan & Gardner (2004)’s study indicated the lack of evidence in supporting any argument on whether financial performance is more important to conventional investors in comparison to socially responsible investors. (Sliwinski & Lobza, 2017, p. 660), similarly, acknowledged the difficulty of giving such conclusion to their research reviews on the financial performance comparison of SR and conventional funds, and in the study they conducted, indicators of difference in utility derived from financial and non-financial performance pointed not to be found. On the other hand, (Renneboog et al., 2008, p. 1739) took a clear position indicating that SR investors give priority to non-financial utility derived from their investment and are willing to accept inferior financial performance. Contrarily to conventional investment, SRI are not expected to be sensitive and react to past financial performance, inferring that investment in socially responsible funds to grow regard less of financial performance and this growth of investment to be consistent and unaffected by past as well as expected future financial performance (Renneboog et al., 2008, p. 1724-1725 & 1739). However, contrary to this Renneboog et al. (2008)’s claim, Cortez et al. (2009) indicate that they found SRF to be sensitive to conventional indexes (or market indexes), in comparison to social responsibility factors or values (Cortez et al., 2009, p. 573 & 579). An additional to the above identified factors affecting fund movement, another variety of the application of the neoclassical economic variables in on the general market. This is to assess and observe how investors and investment funds behave in different state of the market. It is indicated the possibility of the general market condition, i.e. market stability and crises, affecting the financial performance of SRI and Conventional funds in different way
(Sliwinski & Lobza, 2017, p. 660). Nofsinger & Varma (2014)’s study points that the
possibility of socially responsible funds outperforming conventional funds during market crisis or high market risk level and the reverse during stable market conditions (Nofsinger & Varma, 2014, cited in Sliwinski & Lobza, 2017, p. 660). However, Sliwinski & Lobza (2017)’s own study pints to the findings that shows the nonexistence of significant statistical difference in the financial performance of socially responsible- and conventional investment funds during either of the market condition, high and low risk condition (Sliwinski & Lobza, 2017, p. 667). Though not mentioned about actual fund movement, Frydman & Camerer also pointed to the existence of a study that shows more attention being pied by investors to their portfolio during rising market condition and low market volatility (Frydman & Camerer ,2016, p. 664).
3.1 Theoretical point of departure
Theories identified and used in the presiding different prior studies are the base for this study. Those previous studies, however, have their base in economic and finance theories that are well established, for example, Modern portfolio theory and the Capital Asset Pricing Model. They are also based on the principle on how the modern-day market operates. Therefore, it might be appropriate to account for concepts and principles related to the general market and that have legitimate academic establishment. Those concepts and principles relevant to this study are related to product demand, preference, and utility. In addition, it also investigates the research question taking perspective that are related to behavioral finance. This is done by including theories from the field of psychology study, for example pre-reflective and narrative self-awareness.
The relevance of those theories and concepts in relation to this topic is on factors that influence the flow of capital in to- and out of mutual funds. And, in this study, those factors are categorized in to three major categories. Which is Classical economic theory, Behavioral finance, and the general market condition. In the first part the constituents of classical economic theory such as portfolio and CAPM are discussed in relation to the related prior studies. The second part, Under the Behavioral finance category, mainly sociopsychological and Neuropsychological factors are discussed in relation to the respective related previous studies. In the third and last part a specific behavioral factor, which is investors orientation in relation to the general financial market condition is discussed based on the respective prior study.
Bollen (2007)’s study of ‘’Mutual fund attributes and investor behavior’’, which identifies factors affecting the flow of capital between mutual fund types. Other prior related studies that make up the theoretical framework for this study, and for factors affecting capital flow, are research conducted by Hirshleifer and Shumway (2003)’s weather and market performance, Renneboog, et.al (2008)’s past-performance dependence concept, Lopez-Arceiz, et. al (2018)’s and Renneboog, et.al (2011)’s concept of the impact Cultural Environment’s has on the socially responsible investment funds as well as Tippet and Leung (2001)’s study result that indicated demographic-based difference in utility preference. And, Nofsinger and Varma (2014)’s concept of the impact the general market condition has on SRI and conventional fund performance. In the subsequent part those factor categories are discussed in detail.
3.1.1 Classical economic theories and past performance dependency of investments
uncertainty is the reason for why investors have a collection or a portfolio of different investments, not more of one investment (Markowitz, 1991, p. 469 & 470). Consequently, the rational investigation of investors behavior is centered on how investors make decision when they are not certain about the future return of investments and portfolio theory addressed this issue (Markowitz, 1991, p. 469).
The two currently know portfolio theories are Markowitz’s (1959) Bayesian-based Modern Portfolio Theory and Frankfurter and Phillips (1995) Normative portfolio Theory (NPT) (Nawrocki & Viole, 2014, p. 13). Portfolio theory, thus, is developed first by Markowitz (Markowitz, 1991, p. 469). Markowitz’s theory suggests and gives a description of the process that an investor who continuously is enhancing or optimizing its asset value might undergo, in other words the behavior of value optimizing investor (Markowitz, 1991, p. 469). On the other hand, the capital asset pricing model (CAPM) is developed by Sharpe and Lintner and it is based on the portfolio theory developed by Markowitz (Markowitz, 1991, p. 469). The central concept with the CAPM is the state of homogeneous value enhancing behavior amongst investors (Markowitz, 1991, p. 469). Thus, CAPM explains the state of all investors behaving according to Markowitz’s portfolio theory, which is economic equilibrium (Markowitz, 1991, p. 469).
Bollen (2007, P. 686) discusses different assumption related to Capital flow and financial performance, i.e. return, relationship. One such assumption is the efficient market hypothesis where it is argued only fund management expenses should be considered when investing since abnormal return is not feasible. The other is the representative heuristic of Kahneman & Tversky (1982, cited in Bollen, 2007, P. 686), where it is assumed investors considers recent performances. The third is rational learning (Brav & Heaton, 2002, cited in Bollen, 2007, P. 686) which contradicts the efficient market hypothesis and assumes a continues effort to identify new ways of earing positive abnormal return. This study considers, rather, the representative heuristic and investors considers the recent past price index performance to infer for return performance. In addition, due to uncertainty in the return of some of the investments, investors may prefer to move their capital in to different investment funds with different level of return variability or risk level.
This study, on the other hand, does not intend to investigate the comparative financial performance of SRIF and conventional fund. Rather, it intends to study the relationship between capital in-and out flow of investment funds through a change in total net asset (TNA) with weather shocks. Capital flow, however, might be caused by past-financial performance and risk preference of investors besides weather shocks. Therefore, to control the study of capital flow and weather shock is not interfered by past return and risk levels, their relation to the funds will also be under observation.
Therefore, the relationship between the capital flow of the funds and their return performance will be observed to control if the change in capital flow is caused by the funds return performance and not by weather shocks. The relationship between the risk level of the funds and the change in capital flow will also be observed to control if capital flow is caused by the funds risk level and not by weather shocks.
3.1.2 Behavioral finance and factors shaping SR Investment desire
Bollen (2007) indicated, in addition to the rational economic decision making, the possibility for another category of factor affecting capital flow, for example, emotional human behavior. Those factors relate to behavioral finance where different previous studies assess the behavioral difference between cultural environments, demographic variable such as age, gender, and family structure as well as individual’s cognitive ability, that are related to investment choices between SRIF and conventional funds. Behavioral finance is an idea derived from experimentations within the field of economics and psychology to establish legitimate credibility and reliability for models used in both behavioral and empirical analyses (Duxbury, 2015, p. 78). Duxbury’s following direct quotation is identified to help better understand the topic.
‘’The ability to observe directly, control, and manipulate variables of theoretical importance, are well suited to a study of behavioral finance. Many of the key variables of interest in behavioral models are unobservable to researchers examining data from naturally occurring financial markets, hence such empirical studies adopt proxies to capture or measure the effect of many variables of theoretical importance. For example, in the context of portfolio decisions, Baltussen and Post (2011) note that challenges arise when analyzing real-life investment portfolios. An evaluation of the merit of an investor’s portfolio decisions, requires knowledge of their risk preferences which assets they considered and their expectations about them. Such data are largely unobservable, and so difficult to measure or control, in studies of real-life data, but can be controlled and manipulated directly in experimental studies. The ability to control allows experimenters to test the impact of variables of interest on investor behavior and the function of financial markets free from the confounding effects of other variables’’ (Duxbury, 2015, p. 79).