School of Business

Corporate social responsibility exposure and performance of mutual funds

Document Type

Article

Abstract

The authors study the performance consequences of exposure to corporate social responsibility (CSR) through stock holdings for mutual funds. Using a large sample of US domestic mutual funds, they find that funds overweighting low-CSR stocks outperform funds underweighting them by 1.7% to 2.6% annually. This outperformance, however, reverses during the 2008-2009 financial crisis. They also find similar performance patterns among stocks. An equal-weighted high-minus-low CSR stock return spread can explain the CSR-based fund performance spread, whereas a value-weighted spread cannot. These results are consistent with the interpretation that low-CSR funds overweight low-CSR small-cap stocks that offer high returns to investors who are averse to low-CSR investments. Investors tend to avoid low-CSR stocks due to either social norms against these stocks or risk of underperformance of these investments when overall trust in corporations suffers a negative shock (such as during a financial crisis).

Publication Title

Journal of Investing

Publication Date

2019

Volume

28

Issue

2

First Page

53

Last Page

65

ISSN

1068-0896

DOI

10.3905/joi.2019.28.2.053

Keywords

ESG investing, portfolio theory, portfolio construction

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