Borgersa, Derwalla, Koedijkb & Horst: Do social factors influence investment behavior and performance? Evidence from mutual fund holdings


When tastes affect investment decisions of a significant number of investors they have the potential to affect asset prices and consequently also expected returns (Fama and French, 2007). In this paper we evaluate whether tastes for socially sensitive stocks affect holdings of U.S. equity mutual funds. We start with a comparison of socially responsible investment funds to conventional funds and document on the existence of conventional funds that have “more socially responsible” holdings than SRI labeled funds. Subsequently, we analyze whether these exposures to socially sensitive stocks affect mutual fund performance. Our findings indicate that especially investments in Tobacco, Alcohol, and Gambling stocks have the potential to positively affect risk-adjusted fund returns, while exposures to the most socially responsible firms negatively affect performance. This potential is not fully exploited by the mutual funds in our sample as they hold diversified portfolios resulting in small exposure differences between funds. These small exposure differences also explain why the literature has generally found no performance differences between SRI labeled and conventional funds. Based on our main findings we advice the use of holdings based analyses when investigating the effects of social tastes on investment portfolios.

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