Is Socially Responsible Investing A Luxury Good?

Abstract

We investigate the time variability of abnormal returns from socially responsible investing (SRI). Using portfolio regressions and event studies on multiple data sources including analyst ratings, firm announcements and realized incidents, we consistently find that "good" stocks significantly outperform "bad'' stocks during good economic times, e.g., periods with high aggregate consumption and market valuation but underperform during bad times such as recessions. This is consistent with a wealth-dependent investor preference that is more favorable toward SRI during good times, resulting in higher temporary demand for SRI---similar to time-varying shifts in the demand for luxury goods.