Abstract

Ethical investors construct portfolios that reflect important religious or ethical precepts. They implement their strategies in three ways. Some avoid stocks of firms which do not live up to their ethical standards. Others form portfolios of firms which implement the investors' ethical standards. Shareholder activists intentionally purchase stocks of problematic firms to challenge the firms to change. Ethical investors complicate the lives of the firms' management. ;Do they also have a financial impact on the firms? This is expected only in the case when ethical investors act in concert and also control a substantial share of the market. The experience of anti-apartheid investors and U.S. South Africa related firms is a strong test case for the hypothesis since the majority of ethical investors were reluctant to hold the stocks of these firms. The stock market response to a firm's disinvestment announcement may indicate the ability of ethical investors to financially affect firms. Previous studies have produced inconsistent results. ;This study employs event study methodology to measure the effect of ethical investors on returns. It uses a wider event window than previous studies to capture the price pressure or demand shift caused by ethical investors who were constrained by portfolio restrictions from quickly re-entering the market. The sample is adjusted to control for confounding events during the long event window. This study finds that ethical investors did not act in concert and did not have a pronounced effect: on the returns of U.S. firms which sold their South African assets