The investment behavior of socially responsible individual investors

Abstract

Using data on individual investors’ equity mutual fund portfolios from 2003 to 2007, this paper describes the behavior of investors in relation to socially responsible (SR) funds. The results suggest that most SR investors rebalance their portfolios slightly more often than conventional investors do, hold potentially more diversified portfolios, and hold a mixed portfolio combining both conventional and SR funds. Further, while SR investors’ buying decisions are similarly sensitive to the past returns on SR and conventional funds, SR investors’ selling decisions are more sensitive to the past negative returns on SR than on conventional funds, which indicates that they are less likely to sell SR than conventional funds as past negative returns decrease. Moreover, the aggregated flows of SR and conventional funds are similarly sensitive to past returns. However, the aggregated flows of SR funds for which the majority of their investors are sticky SR investors are less sensitive to past positive returns. Finally, sticky SR investors’ flows (at the individual level) are more sensitive to the past positive returns and are less sensitive to the past negative returns on SR than on conventional funds. Although these results suggest that sticky SR investors do have values-driven motives for holding SR funds, their flows to SR funds are less persistent than their flows to conventional funds, which indicates that these investors are less likely to reinvest in SR than in conventional funds.