Socially Responsible Investing: Good Is Good, Bad is Bad

This paper provides a comprehensive analysis of risks and returns of socially responsible investing (SRI) utilizing firm-level data on corporate social responsibility ratings. We demonstrate that firms with high ratings have significantly higher, albeit temporary and time varying, alphas than those with low ratings. In an event study setting, we find that reductions in firms’ social responsibility ratings lead to significantly lower cumulative abnormal returns that dissipate after the second year. We then provide evidence indicating that these differences are induced by time-varying, wealth-dependent shocks to investors’ preferences, which result in highly rated stocks behaving in a fashion akin to luxury goods. The alpha difference between stocks with high and low ratings are significantly more pronounced during good economic times, and is significantly correlated with both luxury consumption from NIPA and the sales growth of luxury-good retailers.