Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

• Published in: Journal of banking & finance Vol. 60; pp. 112 - 126
• Main Authors: Borgers, Arian, Derwall, Jeroen, Koedijk, Kees, ter Horst, Jenke
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.11.2015; Elsevier Sequoia S.A
• Subjects: Controversial stocks; Investment advisors; Investment policy; Investment trusts; Mutual funds; Rates of return; Risk exposure; Sin stocks; Social investing; Social norms; Socially responsible investing; Stocks; Studies; United States; United States > US; M14; Socially responsible investing; G11; Mutual funds; Sin stocks; G23; Social norms; Controversial stocks
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2015.07.001

We study the economic significance of social dimensions in investment decisions by analyzing the holdings of U.S. equity mutual funds over the period 2004–2012. Using these holdings, we measure funds’ exposures to socially sensitive stocks in order to answer two questions. What explains cross-sectional variation in mutual funds’ exposure to controversial companies? Does exposure to controversial stocks drive fund returns? We find that exposures to socially sensitive stocks are weaker for funds that aim to attract socially conscious and institutional investor clientele, and they relate to local political and religious factors. The financial payoff associated with greater “sin” stock exposure is positive and statistically significant, but becomes non-significant with broader definitions of socially sensitive investments. Despite the positive relation between mutual fund return and sin stock exposure, the annualized risk-adjusted return spread between a portfolio of funds with highest sin stock exposure and its lowest-ranked counterpart is statistically not significant. The results suggest that fund managers do not tilt heavily towards controversial stocks because of social considerations and practical constraints.