Beyond Dichotomy: The Curvilinear Relationship between Social Responsibility and Financial Performance

Strategic Management Journal, Vol. 27, No. 11, pp. 1101-1122, September 2006

53 Pages Posted: 28 Feb 2006

See all articles by Michael L. Barnett

Michael L. Barnett

Rutgers Business School, Newark & New Brunswick

Robert M. Salomon

New York University (NYU) - Department of Management and Organizational Behavior

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

A central and contentious debate in many literatures concerns the relationship between financial and social performance. We advance this debate by measuring the financial-social performance link within mutual funds that practice socially responsible investing (SRI). SRI fund managers have an array of social screening strategies from which to choose. Prior studies have not addressed this heterogeneity within SRI funds. Combining modern portfolio and stakeholder theories, we hypothesize that the financial loss borne by an SRI fund due to poor diversification is offset as social screening intensifies because better managed and more stable firms are selected into its portfolio. We find support for this hypothesis through an empirical test on a panel of 61 SRI funds from 1972-2000. The results show that as the number of social screens used by an SRI fund increases, financial returns decline at first, but then rebound as the number of screens reaches a maximum. That is, we find a curvilinear relationship, suggesting that two long-competing viewpoints may be complementary. Furthermore, we find that financial performance varies with the types of social screens used. Community relations screening increased financial performance, but environmental and labor relations screening decreased financial performance. Based on our results, we suggest that literatures addressing the link between financial and social performance move toward in-depth examination of the merits of different social screening strategies, and away from the continuing debate on the financial merits of either being socially responsible or not.

Keywords: stakeholder theory, modern portfolio theory, corporate social responsibility

JEL Classification: L21, M14

Suggested Citation

Barnett, Michael L. and Salomon, Robert M., Beyond Dichotomy: The Curvilinear Relationship between Social Responsibility and Financial Performance (2006). Strategic Management Journal, Vol. 27, No. 11, pp. 1101-1122, September 2006. Available at SSRN: https://ssrn.com/abstract=885950

Michael L. Barnett (Contact Author)

Rutgers Business School, Newark & New Brunswick ( email )

NJ
United States

HOME PAGE: http://www.business.rutgers.edu

Robert M. Salomon

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

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