Red and Blue Investing: Values and Finance

51 Pages Posted: 10 Aug 2008 Last revised: 18 Mar 2010

See all articles by Harrison G. Hong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Leonard Kostovetsky

Carroll School of Management, Boston College

Date Written: March 16, 2010

Abstract

Abstract: Do political values influence investing? We answer this question using data on the political contributions and stock holdings of US investment magers. We find that mutual fund managers who make campaign donations to Democrats hold less of their portfolios (relative to non-donors or Republican donors) in industries that are deemed socially irresponsible (e.g. tobacco, guns and defense, natural resources). Although a higher fraction of Democrat-run mutual funds are socially responsible (SRI), this result holds for non-SRI funds and after controlling for other fund and manager characteristics. The effect is more than one-half of the under-weighting observed for SRI funds. Using the KLD score to measure firm responsibility, we find that Democrat managers also tilt towards firms with positive social features such as excellent employee relations and clean environmental records. We document similar results among a smaller sample of hedge fund managers, suggesting that lax corporate governance in the mutual fund industry is not the main driver of our results. We discuss how political values influence investing and the implications of our findings for the growing SRI movement and stock prices. A simple calibration shows that the pricing implications of Democrat managers' preference for social responsibility are similar in magnitude to the S&P 500 inclusion effect.

Keywords: political affiliation, socially responsible investing, mutual funds, hedge funds

JEL Classification: M14, Z1, G2

Suggested Citation

Hong, Harrison G. and Kostovetsky, Leonard, Red and Blue Investing: Values and Finance (March 16, 2010). Simon School Working Paper No. FR 09-06; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1214382 or http://dx.doi.org/10.2139/ssrn.1214382

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leonard Kostovetsky

Carroll School of Management, Boston College ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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