You are on page 1of 14

Volume 30 Number 8 2005

33

Doing Well While Doing Good Revisited: A Study of Socially Responsible Firms Short-Term versus Long-term Performance
by Todd Shank, Associate Professor of Finance, College of Business, USF St. Petersburg, 140 Seventh Avenue South, St. Petersburg, FL 33701-5016; Daryl Manullang is an Instructor of Finance, and Ron Hill is Bank of America Professor of Corporate Social Responsibility and Founding Dean, College of Business, University of South Florida St. Petersburg. Abstract This article reexamines the doing well while doing good debate within the financial management literature, using comparisons among socially responsible mutual funds (SRMF), the NYSE Composite Index, and a portfolio made up of firms most valued by SRMF managers (MostSRF). The performance of MostSRF did no better or no worse than the overall market or SRMF in three to five year comparisons. However, results from the ten-year performance comparison refute earlier studies and indicate that the market prices social responsibility characteristics in the long run. Given MostSRF outperformed the other two indices in this timeline, a new paradigm for understanding the impact of SRI is revealed. Key words: social responsibility; financial performance; portfolio management Introduction Several generations of finance students have been educated under the assumption that the primary duty of a public organizations management is to maximize stockholder wealth by increasing the value of its common stock (Brigham, Gapenski, & Ehrhardt, 1999). Nonetheless, an essential question remains: How do we balance social concerns against the need to create value for our shareholders? (p. 3). This query increasingly became prominent following the 1962 challenge by Milton Friedman that a corporations social responsibility is to make a profit (Griffin & Mahon, 1997, p.5). However, its pervasive application within society coincided with the babyboomers coming-of-age, a generational cohort that some analysts predicted would allow their value systems to influence their investment choices (Martin, 1986). One outcome has been the rise of socially responsible investing or SRI, which increased by nearly 200 percent in the late 1990s (Spencer, 2001) and now represents 10 percent of all investment dollars in the United States (Sauer, 1997). SRIs mainstream acceptance was solidified by the addition of the Domini Social Equity Fund to 401 (k) plans of companies such as Hewlett Packard, Ford, and The Gap, along with municipalities including the city of New York and the state of Massachusetts (Spencer, 2001). Total investment surpassed $2 trillion by the end of the millennium, with assets in socially responsible mutual funds (SRMF) reaching about $1.5 trillion (Stone, 2000). More recent history notwithstanding, the use of SRI predates the investment strategies of the baby-boom generation. For example, some investors at the turn of the previous century stayed away from firms involved with sin products such as alcohol, tobacco, and

Managerial Finance

34

gambling (Sauer, 1997). By the 1940s, SRI increasingly became visible when government agencies and unions shunned investment opportunities in organizations deemed to have unfair labor practices (Martin, 1986). SRI also experienced significant expansion during the turbulent portion of the 1970s as a consequence of the Vietnam War, urban strife, and Apartheid. Its modern-day growth was complete as socially responsible investors enlarged their concerns to encompass the environment, weapons production, product safety, womens issues, and the local community (Martin, 1986; Sauer, 1997). Hamilton, Jo, and Statman (1993, p. 65) aptly describe SRI as a way for individual investors to integrate money into ones self and into the self one wishes to become. As a result, socially responsible investors select stocks or mutual funds that are consonant with their core values, hoping to send a positive signal to amenable organizations and a distress signal to companies out of compliance. All the same, shareholders still demand an acceptable gain on their investments over time. As Martin (1986, p.33) notes, No one wants to invest in anything thats morally irresponsible. But people want to make money. You wont get that many do-gooders to invest if they cannot make a fair return. The remainder of this paper is organized as follows. The subsequent section presents a literature review that examines theoretical rationales to guide socially responsible investor behavior, social responsibility screens employed by investors and fund managers, and research on the performance of socially responsible portfolios. The next section contains a brief narrative of the method used to select the individual socially responsible firms that form the basis of comparison in this study. Then, data, analyses, and results are described, and a new paradigm for understanding the impact of SRI is revealed. Review of the Literature There are as many perspectives of socially responsible investing as there are options for investors. For example, some finance scholars question the wisdom of using personal values to guide investment strategies. Their concern is particularly appropriate in markets where corporations can voluntarily choose not to incur the additional costs associated with behaving in a socially responsible manner, thus improving their ability to attract capital relative to their more SR counterparts (see Brigham, Gapenski, & Ehrhardt, 1999). On the other hand, firms that operate responsibly may engender goodwill and build stakeholder loyalty, creating a sustainable competitive advantage that can be promoted to advance the valuation of the firm (Sauer, 1997). Of course, a third option contends that equity markets are so vast, liquid, and efficient that it really does not matter whether social screening is performed when selecting firms for investment portfolios (Diltz, 1995, p.64). Social Responsibility Screens Regardless of these diverse perspectives, the growth of SRI, especially during the last twenty years, is undeniable. Most of this expansion has been with socially responsible mutual funds, which purport to offer investors opportunities that meet value-based as well as financial criteria (Stone, 2000). John Rekenthaler of Morningstar defined Socially Responsible Mutual Funds (SRMF) as funds that impose major socially conscious constraints on their investment practices (Statman, 2000, p.32). However, the wide variety of screens that are applied means the definition of social responsibility varies greatly, suggesting that one persons taboo is another persons sacred cow (Statman, 2000, p. 31).

Volume 30 Number 8 2005

35

As a consequence of this variability, SRMF differ significantly in the industries and firms represented by their investments. Most of these policies are exclusionary in nature, and function to eliminate corporations from consideration that engage in certain activities or participate in specific markets. For example, the Social Investment Forum revealed that 84 percent, 72 percent, 69 percent, and 68 percent of SRMF exclude from their portfolios firms associated with tobacco, gambling, weapons production, and alcohol, respectively (Statman, 2000). Within recent years, SRMF have adopted inclusionary policies that seek out organizations that operate in a preferred manner. Exemplars include concern for the environment, human rights, and animal welfare (Spencer, 2001). Of course, these policies also examine the potential for a fair return on investment dollars. While these criteria may work well in theory, their initial application for screening purposes and their monitoring over time is fraught with difficulties. The essential question is whether investors have access to sufficient information to be able to appropriately price socially responsible actions and policies of public firms. Cloninger et al. (2000) note: there are a number of reasons that limit market access to information necessary for the efficient pricing of ethical and unethical behavior. These reasons relate to residual agency costs, costly and asymmetric information, competitive reasons for non-disclosure, asymmetric focus of the press on unethical versus ethical behavior, bounded investor rationality, and the refusal by consumers and investors to pay for ethical behavior lacking the penalties associated with illegal behavior. Recent evidence finds that few reliable sources of data exist to aid portfolio managers in the decision-making process regarding compliance or lack of compliance by corporations with socially responsible standards. Accordingly, there is no such thing as a clean company meeting all the requirements of an ethical investment fund (Martin, 1986, p.33). Relative Performance of Socially Responsible Mutual Funds Regardless of these caveats, much research has been conducted to investigate the performance of SRMF in relation to other investment opportunities. Sauer (1997) finds that previous evidence is mixed, providing no real indication as to the relative potential of these values-based investments. Reyes and Grieb (1998) present studies reporting on stocks subjected to social screens that reveal performance levels below the S&P 500 during the late 1980s, while outperforming the broader market by the early 1990s. Such findings led authors such as Griffin and Mahon (1997, p.6) to conclude: Although numerous researchers have explored the empirical relationship between corporate social performance and corporate financial performance, no definitive consensus exists. These inferences notwithstanding, much of the primary research presented in recent literature triangulate around the same conclusion that social screening appears to have little, if any, effect on portfolio returns (Diltz, 1995, p.66). The findings of Hamilton, Jo, and Statman (1993) are consonant with these results, showing that SRMF performed as well as conventional funds. Guerard (1997) examined month-by-month returns of screened and unscreened portfolios for an eight-year period beginning in the late 1980s, and they found no significant differences between them. Reyes and Grieb (1998) added a

Managerial Finance

36

risk-adjusted dimension to their analysis, and once again found no real differences between SRMF and other matching funds. Statman (2000) advanced one of the most rigorous investigations in the current literature, comparing the performance of the Domini Social Index (DSI) with the S&P 500 during the 1990s as well as a set of SRMF with conventional funds of similar asset size using Jensens Alpha (discussed in next section). While the broader market bested the DSI in risk-adjusted returns, the average gain of SRMF was better than their conventional rivals. However, in neither case were these differences statistically significant, leading the author to conclude that his results give investors little reason for either delight or alarm (Statman, 2000, p.30). This lack of compelling evidence has led to several disparate implications for the financial management community. Consistent with his previous remarks, Statman (2000) contends that socially responsible investing has few downside risks relative to traditional investment strategies. On the other hand, Sauer (1997) believes that these findings represent a positive sign for values-based investing that indicates investors can follow their beliefs without sacrificing performance. A final perspective contends this research demonstrates that acting responsibly is not priced in the market, suggesting that SRI has little impact beyond making investors feel good (Reyes & Grieb, 1998). One shortcoming of prior studies of the performance of socially responsible mutual funds is that none considers the most recent five years (1998-2003), which included a lengthy bear market in stocks. In addition, all of them used performance data periods of less than ten years, leaving the issue of longer-term socially responsible investment performance unstudied. Finally, dissimilarities among the screening methodologies used by SRMF to select socially responsible firms suggest a need for a uniform approach to determining individual, socially responsible U.S. corporations for inclusion in a portfolio. This study examines the performance of a portfolio comprised of the firms most valued by portfolio managers of SRMF. The purpose of the study is to determine if the market prices the social performance of those corporations observed to be leaders in social responsibility. Data and Methodology The purpose of this research is to extend the discussion of doing well while doing good through a comparison of the performance of a portfolio of selected individual firms widely recognized as socially responsible to that of professionally managed mutual funds guided by social responsibility as well as to broader market indicators such as the NYSE Composite Index. The choice of the eleven firms discussed below was based on the analysis of Hill, Stephens, and Smith (2003), who selected the firms that comprise our portfolio of most socially responsible firms. The first step in selecting the eleven firms was to choose from among the socially responsible mutual funds listed by the Social Investment Forum (SFI, see www. socialinvest.org). The Social Investment Forum is a national non-profit membership organization promoting the concept, practice, and growth of socially responsible investing. Focus was placed on large cap growth funds with net assets under management of at least $15,000,000. The twelve SRMF that met these criteria included Acquinas Growth, American Trust Allegiance, Calvert Social Investment Equity A, Citizens Core Growth A, Devcap Shared Return, Domini Social Equity A, Dreyfus Premier 3rd Century A, Green

Volume 30 Number 8 2005

37

Century Equity, MMA Praxis, Neuberger Berman S. R. A, Parnassas Fund, and Walden Social Equity. Table I contains the socially responsible screening criteria used by the selected mutual fund companies. These screens result in both inclusionary and exclusionary practices. For example, the Parnassas Fund looks for companies that make positive investments in the communities in which they do business while the Walden Social Equity Fund restricts investments in companies whose policies negatively impact the neighborhoods in which employees work and live. Consistent with previous discussion, these SRMF generally do
Table I Socially Responsible Screening Criteria

Source: Hill, Stephens and Smith (2003)

Managerial Finance

38

not invest in firms that make products involving abortion, alcohol, gambling, weapons, pornography or tobacco. They lean toward companies that support indigenous rights, the environment, and positive local relationships. The second step involved comparing the top ten stock holdings of these funds. Any holding owned by at least 1/3rd of the selected funds was included in a list of exemplary socially responsible organizations that were used for further analysis. The following eleven companies were identified: American International Group, Bank of America, Cisco, Coca Cola, Fannie Mae, Intel, Johnson and Johnson, Merck, Microsoft, Pfizer and Proctor & Gamble. Table II provides information on the lines of business of the focal companies along with excerpts from their published mission statements and credos. Although all are well known for their socially responsible behavior, they each have unique corporate values. For instance, Intel is committed to youth education while Cisco wants to leverage the Internet for the betterment of society. Fannie Maes focus is on helping lower income families realize their dream of home ownership while Merck strives to use their resources to provide society with products that will improve the overall quality of life.
Table II Overview of Individual Firms Business Description Mission / Credo / Values Insurance and financial Not available services Banking Networking products for the Internet Manufacturer, marketer, and distributor of nonalcoholic beverage concentrates and syrups Committed to community development, environment, helping children with their special needs. We develop, support, and invest in programs that leverage the Internet to contribute to lasting positive change. We focus on education, basic needs, and increased civic engagement. We will adhere to the highest ethical standards, knowing that the quality of our products, the integrity of our brands and the dedication of our people build trust and strengthen relationships. We will serve the people who enjoy our brands through innovation, superb customer service, and respect for the unique customs and cultures in the communities where we do business. We relentlessly seek to maintain, enhance, and expand Fannie Maes diversity, community outreach, work/life balance, employee development, and volunteer programs and initiatives. Were committed to having a positive impact on our employees, our community, and the nation we serve all by doing business responsibly. Intel values education indicated through our financial, technical and staff support of a variety of education programs promoting science, math, engineering and technology. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities.

Company American International Group Bank of America Cisco

Coca Cola

Fannie Mae

Providing financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes of their own Manufacturer of microprocessors Manufacturer and marketer of health care products

Intel

Johnson & Johnson

Volume 30 Number 8 2005


Merck Merck discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health Developer and marketer of computer operating systems and applications

39
The mission of Merck is to provide society with superior products and services innovations and solutions that improve the quality of life and satisfy customer needs to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. There are two key aspects to Microsofts past and future success: our vision of technology and the values that we live by every day as a company. To reflect our role as an industry leader and to focus our efforts on the opportunities ahead, we have embraced a new corporate mission: To enable people and businesses throughout the world to realize their full potential. We will become the worlds most valued company to patients, customers, colleagues, investors, business partners, and the communities where we work and live. P&G people are committed to serving consumers and achieving leadership results through principle-based decisions and actions.

Microsoft

Pfizer

Pfizer Inc is a research-based, global pharmaceutical company Proctor & Manufacturer and marketer Gamble of soaps and other consumer products. Source: Hill, Stephens and Smth (2003)

Various techniques exist to evaluate the performance of portfolio assets. Following the lead of Hamilton, Jo and Statman (1993), our research evaluated portfolio returns adjusting for risk using the Jensens Portfolio Technique. This tool evaluates asset portfolios based on their relative and absolute performance (Moses, 1989) and provides a measure of excess returns for each mutual fund. The risk adjusted excess returns are represented by Jensens (1968) Alpha: E(Ri Rf) = ai + bi [E(Rm Rf)] + ei where Rm is the monthly return on the NYSE Composite Index and Rf is the monthly return on the three month U.S. Treasury bill (Hamilton, Jo, and Statman, 1993). Large-cap, socially responsible mutual funds were identified using Social Investment Forum categorizations. Monthly returns were obtained from Yahoo finance.com, including dividend values for each of the funds and individual firms for the period from June 1993 to May 2003. Accordingly, SIF categorized forty-five mutual funds as large cap. Of these, only thirty-one possessed at least 3 years of performance history and only five SR mutual funds were established at least 10 years prior. The stock values of each of the eleven selected socially responsible firms were used to create the Most-Socially-Responsible Fund (MostSRF), a portfolio of supra-socially responsible assets. The individual assets represent equally weighted concerns within the created portfolio, with returns for all portfolios calculated using the following formula: Rt = [Vt+1 Vt + D0t] / Vt where Rt is the portfolio return at time t, Vt+1 is the portfolio value at the end of the holding period, and D0t represents any dividend payout during the period t. We calculated Jensens Alpha, separately, for several portfolios ([1] MostSRF, [2] a sample of SRMF, and [3] all NYSE stocks) in order to see if any were able to provide excess returns for one or more of three sub-periods. These sub-periods represent three-, five-, and ten-year performances of all portfolios. Our expectation, given prior research discussed in the literature review, is that no significant excess returns were earned by the so-

Managerial Finance

40

cially responsible portfolios since value expressive features are not priced in efficient markets. However, It may be that these eleven firms represent a better example of social responsibility and as a group make for a truer comparison (Hill, Stephens, and Smith, 2003, p.362). Special focus was placed on the ten-year performance of the MostSRF to determine if evidence supports the theory that being socially responsible is a long-term value maximizing strategy for major U.S. corporations. Results The regression results for all portfolios recent three-year performances are presented in Table III. The most portfolios were examined for this first sub-period since many SRMF exist with at least a three-year history of return data. The excess returns of 29 of the 31 mutual funds (all but one, negative) are not statistically different from zero at the 95% level. Two funds, the Dreyfus Premier Third Century R and the Noah Fund, provided returns that were negative and statistically significant. Annualized returns were -22.1% and -24.8% respectively. The three-year performance for MostSRF, although negative like the rest of the market, was not shown to be statistically different than the market.
Table III Excess Returns Estimated on Monthly Returns: June 2000- May 2003 FUND Monthly TAnnualized Excess statistic Excess Return Return ATAFX AQEGX AQEIX BRLIX CLCIX CSIEX CSECX CEYIX WAIDX WINIX MYPVX DESRX DSEFX DIEQX DTCAX DTCBX -0.0182 -0.0034 -0.0061 -0.0104 -0.0074 -0.0003 -0.0010 -0.0004 -0.0158 -0.0143 -0.0070 -0.0121 -0.0133 -0.0133 -0.0166 -0.0172 -1.618 -0.525 -0.644 -1.126 -0.648 -0.034 -0.105 -0.036 -1.304 -1.210 -0.485 -1.322 -1.337 -1.376 -1.410 -1.505 -21.79% -4.77% -7.32% -12.43% -8.90% -0.37% -1.16% -0.45% -18.22% -17.11% -8.34% -14.56% -15.95% -15.93% -19.86% -20.61% Adjust R2 -0.0234 0.0394 0.0230 -0.0195 0.0144 -0.0008 -0.0010 0.0265 -0.0139 -0.0137 0.0008 0.0203 -0.0155 -0.0056 -0.0148 -0.0140 N

American Trust Allegiance Aquinas Growth Aquinas Value Bridgeway Ultra Large 35 Index Calvert Large Cap Growth I Calvert Social Investment Eq A Calvert Social Investment Eq C Calvert Social Investment Eq I Citizens Core Growth A Citizens Core Growth I Citizens Value (Meyer's Pride Val) DEVCAP Shared Return Domini Social Equity A Domini Social Equity I Dreyfus Premier Third Century A Dreyfus Premier Third Century B

0.1152 0.2716 0.2940 0.1230 0.2983 0.2078 0.2080 0.2960 0.1929 0.1961 0.3333 0.2767 0.1559 0.1985 0.1890 0.1888

36 36 36 36 30 36 36 28 36 36 36 36 36 36 35 36

Volume 30 Number 8 2005


Dreyfus Premier Third Century C Dreyfus Premier Third Century R Dreyfus Premier Third Century T Dreyfus Premier Third Century Z Green Century Equity MMA Praxis Core Stock Neuberger Berman Soc Resp Inv Noah Fund Parnassus Equity Income Parnassus Fund Security Social Awareness A Security Social Awareness B Sierra Club Stock Fund Walden Social Equity Fund Women's Equity S.R. Portfolio 3 Years [36 mo] DTCCX DRTCX DTCTX DRTHX GCEQX MMPGX NBSRX NOAHX PRBLX PARNX SWAAX SWABX SCFSX WSEFX FEMMX -0.0172 -0.0184 -0.0169 -0.0164 -0.0127 -0.0078 -0.0034 -0.0207 0.0024 -0.0016 -0.0112 -0.0112 -0.0035 -0.0039 -0.0023 -0.0030 -1.506 -1.708 -1.479 -1.444 -1.270 -1.046 -0.366 -1.734 0.282 -0.093 -1.179 -1.254 -0.264 -0.533 -0.359 -0.451 -20.62% -22.08% -20.24% -19.73% -14.93% -9.32% -4.07% -24.81% 2.94% -1.87% -13.44% -14.32% -4.20% -4.72% -3.35% -3.61% 0.1879 0.1712 0.1948 0.1891 0.1787 0.1109 0.0723 0.1140 0.0967 0.2424 0.1691 0.1693 0.2427 0.1394 0.1437 0.0223 -0.0141 -0.0151 -0.0129 -0.0138 -0.0107 -0.0168 -0.0259 -0.0242 -0.0224 -0.0176 -0.0115 -0.0116 0.0060 -0.0094 -0.0102 -0.0288

41
36 36 36 36 36 36 36 36 36 36 36 36 36 36 36 36

*Annual excess return: Monthly excess returns x 12

The regression results for all portfolios recent five-year performance are reported in Table IV. For this second sub-period, twenty-one SRMF had at least a five-year history of return data. None of the SRMF examined provided significantly different returns from the market index. The MostSRF during this period also was not significantly different from the market index and reflected a t-statistic of nearly zero. Results indicate no market pricing of value expressive features of the corporations comprising these portfolios.
Table IV Excess Returns Estimated on Monthly Returns: June 1998 - May 2003 FUND Monthly TExcess Adjust Excess statistic Return R2 Return (% per year) American Trust Allegiance ATAFX -0.0031 -0.324 -3.72% 0.0578 -0.0176 Aquinas Growth AQEGX -0.0107 -1.465 -12.84% 0.0608 -0.0146 Aquinas Value AQEIX -0.0027 -0.370 -3.28% 0.1363 -0.0045 Bridgeway Ultra Large 35 Index BRLIX Calvert Large Cap Growth I CLCIX Calvert Social Investment Eq A CSIEX 0.0030 0.412 3.65% 0.1312 -0.0053 Calvert Social Investment Eq C CSECX 0.0023 0.304 2.70% 0.1293 -0.0058

55 60 60

60 60

Managerial Finance
Calvert Social Investment Eq I CEYIX Citizens Core Growth A WAIDX -0.0051 Citizens Core Growth I WINIX -0.0046 Citizens Value (Meyer's Pride Val) MYPVX -0.0018 DEVCAP Shared Return DESRX -0.0044 Domini Social Equity A DSEFX -0.0048 Domini Social Equity I DIEQX -0.0050 Dreyfus Premier Third Century A DTCAX Dreyfus Premier Third Century B DTCBX Dreyfus Premier Third Century C DTCCX Dreyfus Premier Third Century R DRTCX Dreyfus Premier Third Century T DTCTX Dreyfus Premier Third Century Z DRTHX -0.0086 Green Century Equity GCEQX -0.0044 MMA Praxis Core Stock MMPGX -0.0076 Neuberger Berman Soc Resp Inv NBSRX -0.0038 Noah Fund NOAHX -0.0072 Parnassus Equity Income PRBLX 0.0036 Parnassus Fund PARNX 0.0098 Security Social Awareness A SWAAX -0.0053 Security Social Awareness B SWABX -0.0062 Sierra Club Stock Fund SCFSX Walden Social Equity Fund WSEFX Women's Equity FEMMX -0.0016 S.R. Portfolio 5 Years [60 mo] 0.0000 *Annual excess return: Monthly excess returns x 12

42

-0.580 -0.517 -0.189 -0.600 -0.629 -0.657

-6.09% -5.46% -2.20% -5.26% -5.80% -5.96%

0.0849 0.0831 0.2440 0.1529 0.0776 0.1012

-0.0137 -0.0139 0.0045 -0.0008 -0.0134 -0.0104

60 60 57 60 60 60

-1.052 -0.580 -1.200 -0.537 -0.704 0.547 0.791 -0.751 -0.866

-10.30% -5.31% -9.12% -4.55% -8.58% 4.34% 11.77% -6.39% -7.39%

0.0877 0.0890 0.0024 0.0398 0.0088 0.0510 0.1991 0.0448 0.0432

-0.0129 -0.0121 -0.0172 -0.0160 -0.0175 -0.0150 -0.0075 -0.1750 -0.0176

60 60 60 60 59 60 60 55 55

-0.239 0.001

-1.92% 0.01%

0.0483 -0.0153 -0.0006 -0.0172

60 60

The regression results for all portfolios recent ten-year performance are reported in Table V. For this third sub-period, only five SRMF had a ten-year history of return data. Although none of the five provided a significantly different return from the market index, all provided positive returns for this long-term horizon. However, the eleven firms representing the MostSRF provided a return that was both positive and significant. At an annualized 15% return, the MostSRF would have yielded socially responsible investors with an excess return beyond the general market index and out performed the established professionally managed SRMF.
Table V Excess Returns Estimated on Monthly Returns June 96 - May 03/June 93 - May 03 FUND Monthly TExcess Excess statistic Return(% Return per year) American Trust Allegiance ATAFX Aquinas Growth AQEGX Aquinas Value AQEIX Bridgeway Ultra Large 35 Index BRLIX Calvert Large Cap Growth I CLCIX

Adjust R2

Volume 30 Number 8 2005


Calvert Social Investment Eq A CSIEX 0.0049 Calvert Social Investment Eq C CSECX Calvert Social Investment Eq I CEYIX Citizens Core Growth A WAIDX Citizens Core Growth I WINIX Citizens Value (Meyer's Pride MYPVX Val) DEVCAP Shared Return DESRX Domini Social Equity A DSEFX 0.0063 Domini Social Equity I DIEQX Dreyfus Premier Third Century A DTCAX Dreyfus Premier Third Century B DTCBX Dreyfus Premier Third Century C DTCCX Dreyfus Premier Third Century R DRTCX 0.0036 Dreyfus Premier Third Century T DTCTX Dreyfus Premier Third Century Z DRTHX Green Century Equity GCEQX MMA Praxis Core Stock MMPGX Neuberger Berman Soc Resp Inv NBSRX Noah Fund NOAHX Parnassus Equity Income PRBLX 0.0092 Parnassus Fund PARNX 0.0205 Security Social Awareness A SWAAX Security Social Awareness B SWABX Sierra Club Stock Fund SCFSX Walden Social Equity Fund WSEFX Women's Equity FEMMX S.R. Portfolio 10 Years [120 mo] 0.0126 *Annual excess return: Monthly excess returns x 12 0.389 5.89% -0.632 -0.0117

43
84

0.502

7.59%

-1.113 -0.0106

84

0.313

4.37%

-1.199 -0.0070

120

0.903 0.986

11.06% 24.63%

-1.803 -0.0056 -2.152 -0.0099

84 84

2.945

15.08%

-0.0556 0.0063

120

Summary and Interpretation The three- and five-year performance results of our study lend support to earlier investigations by scholars such as Hamilton, Jo, and Statman (1993) and Statman (2000), which concluded that the performance of SRMF is not significantly different from the universe of other managed portfolios. Even the inclusion of data from the MostSRF for both the threeand five-year periods provided no statistically significant excess return beyond the market in general as measured by Jensens alpha. This means that the performance of firms identified as socially responsible by a preponderance of professional money managers did no better than the overall market. The lack of any significant short-term performance differences from the general market reinforces the belief that little financial benefit can be obtained by investors selecting our supra-set of socially responsible investments in the short run. These results also support Statmans assertion that market forces do not price socially responsible characteristics in the short run and that these characteristics appear to be included in the market risk premium defined in CAPM. However, it is also implied that, although investors dedicated to socially responsible investing may not realize additional financial returns, they will not be economically penalized for their investment philosophy.

Managerial Finance

44

However, the results from the group of eleven firms (MostSRF) ten-year performance tend to refute these earlier studies and indicate that the market prices social responsibility characteristics in the long run. Specifically, the Jensens alpha for the portfolio constructed of the eleven supra-socially responsible firms is positive and significant. This means that the long-term performance of the firms identified as socially responsible by a preponderance of professional money managers was better than the overall market. Comparatively, the five SRMF evaluated in this research failed to provide a significant and positive alpha during the same period. Several implications of these findings are relevant for financial analysts. First, analysts may want to consider forming new portfolios for their clients by selecting individual firms identified as socially responsible by a majority of SRMF managers. It seems likely that the level of financial disclosure required of corporations will grow as a result of added public scrutiny and regulations, increasing public access to information necessary for efficient pricing of socially responsible behavior. Logically, this may lead to greater awareness of corporate social responsibility among investors, increasing their interest and investment in firms with widely recognized reputations for social responsibility. Second, the superior long-term performance of the MostSRF portfolio supports basic financial theory which asserts that a firms socially responsible actions are priced by the market and lead to superior long-term financial performance, maximizing shareholder wealth. It is quite possible that a firm must establish a history of noteworthy socially-sanctioned behavior before investors recognize this performance and vote appropriately with their investment dollars. Most financial analysts recognize the value of long-term investing, and they may now suggest to their clients that doing well while doing good operates within the same time horizon. Endnote The prior studies with their corresponding data periods are; [1] Hamilton, Jo, and Statman (1993): 1981-1990, [2] Gifford and Mahon (1997):1987-1994, [3] Reyes and Gibb (1998): 1986-1995, [4] Statman (2000): 1990-1998.

Volume 30 Number 8 2005


References

45

Brigham, E. F., Gapenski, L. C., & Ehrhardt, M. C. (1999). Financial management: Theory and practice, ninth edition. Dryden Press, Orlando: FL. Cloninger, D., Aggarwal, R., Karpoff, J., Lacey, N., and Smith, C. (2000). Doing Well by Doing Good: Do Financial Markets Price Ethical Behavior? Financial Practice and Education, (Fall/Winter), pp.24-33. Diltz, J. D. (1995). Does social screening affect portfolio performance? Journal of Investing, 4 (Spring), pp.64-69. Griffin, J. J., & Mahon, J.F. (1997). The corporate social performance and corporate financial performance debate: Twenty-five years of incomparable research. Business and Society, 36 (March), pp.5-31. Guerard, J. B. (1997). Is there a cost to being socially responsible in investing? Journal of Investing, 6 (Summer), pp.11-18. Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analysts Journal, 49 (November/December), pp.62-66. Hill, R., Stephens, D., and Smith, I. (2003). Corporate Social Responsibility: An Examination of Individual Firm Behavior. Business and Society Review, 108 (3), 339-364. Jensen, M. (1968). The performance of mutual funds in the period 1945-1964. Journal of Finance, 23 (May), pp.389-415. Martin, J. (1986). Happy returns for do-gooders. Financial World, March 18, pp.32-33. Moses, E. A., Cheney, J. M. (1989). Investments: analysis, selection and management. West Publishing Company. Reyes, M. G., & Grieb, T. (1998). The external performance of socially-responsibt le mutual funds. American Business Review, 16 (1), pp.1-7. Sauer, D. A. (1997). The impact of socially-responsible screens on investment performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Fund. Review of Financial Economics, 6 (2), pp.137-149. Spencer, R. C. (2001). Assets in socially screened investments grew by 183%. Employee Benefit Plan Review, 56 (August), pp.30-32.

Managerial Finance

46

Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, May/June, pp.30-39. Stone, B. A. (2001). Corporate social responsibility and institutional investment. Business and Society, 40 (1), pp.112-117. Stone, B. A. (2000). Social responsibility and institutional investing: An empirical analysis of the environmental screen. Journal of Investing, 9 (Fall), pp.81-94.