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

Arian Borgers, J.M.M. Derwall, Kees Koedijk*, Jenke ter Horst

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

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. (C) 2015 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)112-126
Number of pages15
JournalJournal of Banking and Finance
Volume60
DOIs
Publication statusPublished - Nov 2015

Keywords

  • Mutual funds
  • Social norms
  • Sin stocks
  • Controversial stocks
  • Socially responsible investing

Cite this

@article{5eb691e178f34e0e9814a81a63baa356,
title = "Do social factors influence investment behavior and performance? Evidence from mutual fund holdings",
abstract = "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. (C) 2015 Elsevier B.V. All rights reserved.",
keywords = "Mutual funds, Social norms, Sin stocks, Controversial stocks, Socially responsible investing",
author = "Arian Borgers and J.M.M. Derwall and Kees Koedijk and {ter Horst}, Jenke",
year = "2015",
month = "11",
doi = "10.1016/j.jbankfin.2015.07.001",
language = "English",
volume = "60",
pages = "112--126",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier Science BV",

}

Do social factors influence investment behavior and performance? Evidence from mutual fund holdings. / Borgers, Arian; Derwall, J.M.M.; Koedijk, Kees; ter Horst, Jenke.

In: Journal of Banking and Finance, Vol. 60, 11.2015, p. 112-126.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

T1 - Do social factors influence investment behavior and performance? Evidence from mutual fund holdings

AU - Borgers, Arian

AU - Derwall, J.M.M.

AU - Koedijk, Kees

AU - ter Horst, Jenke

PY - 2015/11

Y1 - 2015/11

N2 - 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. (C) 2015 Elsevier B.V. All rights reserved.

AB - 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. (C) 2015 Elsevier B.V. All rights reserved.

KW - Mutual funds

KW - Social norms

KW - Sin stocks

KW - Controversial stocks

KW - Socially responsible investing

U2 - 10.1016/j.jbankfin.2015.07.001

DO - 10.1016/j.jbankfin.2015.07.001

M3 - Article

VL - 60

SP - 112

EP - 126

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -