The authors considered two competing hypotheses. On the one hand, investing in firms that comply with social responsibility practices is likely to reduce the set of investment opportunities available and increase their monitoring costs. Ethical compliance would then negatively impact financial performance. On the other hand, fund managers that target socially responsible firms might in fact target firms with solid financial fundamentals, which in turn would translate into higher performance. In other words, the multiple screening steps taken by fund managers may eliminate poorly managed companies with underperforming stocks. In this case, investing in socially responsible stocks would be a value-generating strategy.
Their study covered the period from 2003 through 2011 and 2,168 U.S. equity mutual funds. To measure risk-adjusted returns, the authors used the four factors of market beta, size, value and momentum. The following is a summary of their findings: