Is Socially Responsible Investing A Luxury Good?

Abstract

We investigate the time variability of abnormal returns from socially responsible investing (SRI) utilizing firm-level data on corporate social responsibility ratings. While firms with high ratings have marginally higher average alphas than those with low ratings, these alphas are time varying, with high-ranked stocks significantly outperforming low-ranked ones during good economic times, but significantly underperforming them during bad economic times. In addition, reductions in firms' social responsibility ratings lead to temporarily lower abnormal returns --- a feature more pronounced during good economic times. Furthermore, we document that after individual firm's positive CSR related press announcement, abnormal returns are significantly positive during good times while mildly negative if the announcement happens during bad times. In totality, the findings are consistent with time-varying, wealth-dependent preferences toward SRI, which result in more responsible stocks behaving akin to luxury goods. This interpretation is further enhanced by the fact that the alpha difference is significantly correlated with both luxury consumption from NIPA and the sales growth of luxury-good retailers.