A Tale of Values-Driven and Profit-Seeking Social Investors

Abstract:     
A segmentation of the socially responsible investing (SRI) movement by values-versus-profit orientation solves the puzzling evidence that both socially responsible and controversial stocks produce superior returns. We derive that the segment of values-driven investors, who are willing to sacrifice financial return to derive non-pecuniary utility, is primarily served by “negative” screens that avoid controversial stocks. Consistent with values affecting stock prices, controversial stocks produce anomalously positive returns. The profit-driven segment is best served by specific “positive” screens involving environmental and social issues, which also have produced superior returns. The finding that each segment is served by a different form of SRI explains why the average SRI mutual fund, which adopts a mixture of screens, neither outperforms nor underperforms conventional peers. Our conclusions highlight that different views about SRI that are observed in the literature are complementary in the short run, which begs the question whether SRI should be the only term for different types of social investment practices. However, economic theory predicts that profit-generating opportunities disappear in the long run, which is supported by our empirical analysis over the period 1992-2008.

Number of Pages in PDF File: 41

Keywords: Investor Behavior, Values, Socially Responsible Investing (SRI), Risk, Return

JEL Classification: A13, G11

working papers series