Statman and Glushkov (2008)
Statman, Meir, and Denys Glushkov. "The wages of social responsibility." Working Paper, Santa Clara University, 2008.
This interesting study evaluates the performance of companies liked and disliked over by social investors, and finds offsetting performance effects: "We find that stocks of companies with high ratings on social responsibility characteristics outperformed companies with low ratings. However we also find that 'shunned' stocks [i.e., alcohol, tobacco, gambling, firearms, military, and nuclear] outperformed those in other industries... The two effects balance out, such that socially responsible indexes have returns that are approximately equal to those of conventional indexes."
For the analysis of positive companies, the authors develop a list of companies with high social responsibility scores (KLD data) in the areas of community, diversity, employee relations, environment, and products. Each company is scored using a summation of strengths minus weaknesses. The highest-scoring company (year-end 2006) was Hewlett-Packard with +12, the low was Wal-Mart at -9. The average company on the DS400 (formerly the Domini Social Index) had a score of +0.65 as compared with -1.55 for the S&P 500.
Of 2,955 companies reviewed, the authors find 198 'shunned' companies, "namely those with one or more concern indicators relating to tobaccol, alcohol, gambling, firearms, military or nuclear."
Returns are evaluated over the 1992-2007 time period using CAPM, a three-factor (Fama/French) model, and a four-factor (Carhart) model. "We find, in general, that stocks of companies with high social responsibility scores provided higher returns than those of companies with low scores... The higher returns of companies with high scores are especially evident in a long-short portfolio of companies that are 'top overall' and 'bottom overall'." But the authors also confirm and extend the finding of Hong and Kacperczyk (2006) that sin stocks have outperformed historically. This was statistically significant in the CAPM and three-factor models, but not in the four-factor model.
These findings, the authors conclude, are "consistent with a world where the social responsibility feature of stocks is not priced. But it is also consistent with the world we find, where return advantages of some social responsibility criteria are offset by return disadvantages of other social criteria."
LK comment: This paper won the 2008 Moskowitz Prize.
Link (working paper): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1372848
Link (published version): https://www.cfapubs.org/doi/abs/10.2469/faj.v65.n4.5