The Effect of Socially Responsible Investing on Portfolio Performance

15 Pages Posted: 26 Oct 2007

See all articles by Peer C. Osthoff

Peer C. Osthoff

University of Cologne - Centre for Financial Research (CFR)

Alexander Kempf

University of Cologne - Department of Finance & Centre for Financial Research (CFR)

Abstract

More and more investors apply socially responsible screens when building their stock portfolios. This raises the question whether these investors can increase their performance by incorporating such screens into their investment process. To answer this question we implement a simple trading strategy based on socially responsible ratings from the KLD Research & Analytics: Buy stocks with high socially responsible ratings and sell stocks with low socially responsible ratings. We find that this strategy leads to high abnormal returns of up to 8.7% per year. The maximum abnormal returns are reached when investors employ the best-in-class screening approach, use a combination of several socially responsible screens at the same time, and restrict themselves to stocks with extreme socially responsible ratings. The abnormal returns remain significant even after taking into account reasonable transaction costs.

Suggested Citation

Osthoff, Peer C. and Kempf, Alexander, The Effect of Socially Responsible Investing on Portfolio Performance. European Financial Management, Vol. 13, No. 5, pp. 908-922, November 2007. Available at SSRN: https://ssrn.com/abstract=1024331 or http://dx.doi.org/10.1111/j.1468-036X.2007.00402.x

Peer C. Osthoff

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Alexander Kempf (Contact Author)

University of Cologne - Department of Finance & Centre for Financial Research (CFR) ( email )

Cologne, 50923
Germany
+49 221 470 2714 (Phone)
+49 221 470 3992 (Fax)

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