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The effect of socially responsible investing on portfolio performance

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  • Kempf, Alexander
  • Osthoff, Peer
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    Abstract

    More and more investors apply socially responsible screens when building their stock portfolios. This raises the question whether these investors can increase their performance by incorporating such screens into their investment process. To answer this question we implement a simple trading strategy based on socially responsible ratings from the KLD Research & Analytics: Buy stocks with high socially responsible ratings and sell stocks with low socially responsible ratings. We find that this strategy leads to high abnormal returns of up to 8.7% per year. The maximum abnormal returns are reached when investors employ the best-in-class screening approach, use a combination of several socially responsible screens at the same time, and restrict themselves to stocks with extreme socially responsible ratings. The abnormal returns remain significant even after taking into account reasonable transaction costs. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-10.

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    Date of creation: 2007
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    Handle: RePEc:zbw:cfrwps:0610

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    Related research

    Keywords: Socially Responsible Investing; Portfolio Management; Trading Strategy;

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    1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    2. Derwall, Jeroen & Guenster, Nadja & Bauer, Rob & Koedijk, Kees, 2005. "The eco-efficiency premium puzzle," Open Access publications from Maastricht University urn:nbn:nl:ui:27-19331, Maastricht University.
      • Derwall, J.M.M. & Günster, N.K. & Bauer, R. & Koedijk, C.G., 2004. "The Eco-Efficiency Premium Puzzle," Research Paper ERS-2004-043-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    3. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 107-155, February.
    4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    5. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July.
    6. Bauer, Rob & Koedijk, Kees & Otten, Róger, 2005. "International evidence on ethical mutual fund performance and investment style," Open Access publications from Maastricht University urn:nbn:nl:ui:27-19330, Maastricht University.
    7. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non-ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1465-1493.
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