Barnett, Michael L. and Robert M. Salomon. "Porous, Pious, and Prosperous: The Curvilinear Relationship Between Social Responsibility and Financial Performance." Working Paper, November 2003.

Examines the relationship between the returns of 61 screened mutual funds and the stringency of their social screens. The time period studied is from the funds' inception date (earliest is 1972) through 2000. Returns data are from CRSP, with additional data from Weisenberger and ICDI. Includes control variables for fund age and asset allocations (stocks vs. bonds), but not for price/book, market cap, or price momentum. KLD social factors are then used to help explain risk-adjusted (beta) monthly returns, as well as a measure of screening intensity derived from data provided by the Social Investment Forum.

There are several interesting findings: 1) The screened funds underperformed the S&P on a nominal basis, but outperformed on a risk-adjusted basis. 2) The best performers were those with the strongest and weakest social screens - funds with moderately stringent screens lagged. 3) Some social screens, notably Equal Employment, Community Relations, and Environment, had a statistically significant (P<0.05) impact on returns. By contrast, Labor Relations and Community investment variables did not have a significant impact.

"Our findings suggest that the relationship between relationship between financial and social performance is neither strictly negative nor strictly positive. Rather, it is curvilinear, with the strongest financial returns to low and high levels of social responsibility, and significantly lower returns to moderate levels of social responsibility."