Corporate Social Responsibility Exposure and Performance of Mutual Funds

Abstract

We study the performance consequences of exposure to corporate social responsibility (CSR) through stock holdings for mutual funds. Using a large sample of U.S. domestic mutual funds, we find that funds overweighting low-CSR stocks outperform funds underweighting them by between 1.7% and 2.6% annually. This outperformance, however, reverses during the 2008-2009 financial crisis. We also find similar performance patterns among stocks. An equal-weighted high-minus-low CSR stock return spread can explain the CSR-based fund performance spread, whereas a value-weighted spread cannot. These results are consistent with the interpretation that low-CSR funds overweight low-CSR small-cap stocks that offer high returns to investors who are averse to low-CSR investments. Investors tend to avoid low-CSR stocks due to either social norms against these stocks or risk of underperformance of these investments when overall trust in corporations suffers a negative shock (such as during a financial crisis).