Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets

• Author: Andreas Ziegler,Janick Christian Mollet
• Published date: 01 November 2014
• Date: 01 November 2014
• DOI: http://doi.org/10.1016/j.rfe.2014.08.003

Socially responsible investing and stock performance: New empirical

evidence for the US and European stock markets

Janick Christian Mollet

a,b

, Andreas Ziegler

a,b,c,

⁎

a

Centerfor Corporate Responsibilityand Sustainability(CCRS), Universityof Zurich, Switzerland

b

Centerof Economic Research (CER),ETH Zurich, Switzerland

c

Universityof Kassel, Germany

abstractarticle info

Articlehistory:

Received15 March 2014

Receivedin revised form 25 July 2014

Accepted30 August 2014

Availableonline 7 September 2014

JEL classification:

G11

G12

Q56

M14

Keywords:

Sociallyresponsible investing(SRI)

Stockperformance

Portfolioanalysis

Asset pricingmodels

Risk factors

Thispaper empiricallyexamines the theoreticallyambivalent relationshipbetweensocially responsibleinvesting

(SRI) and stockperformance. It contributes to the existingliterature by considering boththe US and the entire

European stock markets and by using consistent world-wide corporate sustainability performance data. Our

portfolio analysis from 1998 to 2009 is based on the common four-factor model according to Carhart (1997),

which comprises market return, size, value, and momentum f actors. We show for the US and the European

stock markets that SRI is associatedwith large-sized firms. The insignificant abnormal stock returns for SRI in

bothregions are the main result ofour paper. Therefore, ourstudy supports the view thatSRI stocks are correctly

priced by marketparticipants, although we cannot rule out thata corresponding mispricing has existedbefore

the beginningof our observation period in 1998.

© 2014 ElsevierInc. All rights reserved.

1. Introduction

Growing individual awareness of environmental, social, and ethical is-

sues is strongly affecting purchase decisions of market participants, for ex-

ample, with respect to certified green or fair-trade products (Kitzmueller

& Shimshack, 2012). This development is fueling private and institutional

investment decisions towards socially responsible investing (SRI), also la-

beled ethical or sustainable investing (Renneboog, Terhorst, & Zhang,

2008). This investment strategy consists of choosing stocks on the basis

of environmental, social, and ethical screens (Barnett & Salomon, 2006).

SRI has experienced strong growth around the world. Fig. 1 reports that

according to Eurosif(2008, 2010, 2012), core SRI in Europe grewfrom

34 billion €in 2002 to 2630 billion €in 2011. For the US, the Forum for

Sustainable and Responsible Investment reports that one out of eight

invested US dollars (USD) follows SRI guidelines. According to Fig. 1,the

assets under management following SRI screening increased from 166

billion USD in 1995 to 3314 billion USD in 2011(US SIF, 2012). While

these data forthe US and Europe should not be compared directly due

to different SRI categorization schemes, theyreveal the increasing popu-

larity of SRI.

The growthin the volume SRI assets has attractedacademic interest

so that severalempirical studies examinethe relationship between en-

vironmental, social, or ethical inves tments and stock performance.

Methodologically, these studies use common micro-econometric ap-

proaches (Filbeck & Gorman, 2004; Zi egler, Schröder, & Rennings,

2007), the short-term event study a pproach (Cañón-de Francia &

Garcés-Ayerbe,2009; Capelle-Blancard & Laguna, 2010;Deng, Kang, &

Low, 2013; Fisher-Vanden & Thorburn, 2011; Krueg er, in press;

Oberndorfer,Schmidt,Wagner, & Ziegler,2013; Teoh, Welch,& Wazzan,

1999), or portfolio analyses (Bebchuk, Cohen ,& Wang , 2013; Eccles,

Ioannou, & Serafeim, in press; Edman s, 2011; Hong & Kacperczyk,

2009). Most studies in thisfield are based on the third approach by di-

rectly considering the investorperspective, i.e. by comparingthe stock

performance of SRI funds or portfolios with the stock performance of

conventionalfunds or portfolios.

One direction ofsuch portfolio analyses examines theperformance

of sustainability stock indexes (Bauer, Koedijk, & Otten, 2005; Sauer,

1997; Schröder, 2007), such as the Domin i 400 Social Index. These

stock indexes like the Dow Jones Sustainability Index family (Ziegler,

2012; Ziegler & Schröder, 2010) constitute the basis for some socially

Reviewof Financial Economics 23 (2014)208–216

⁎Correspondingauthor at: Universityof Kassel, Germany.

E-mailaddress: andreas.ziegler@uni-kassel.de(A. Ziegler).

http://dx.doi.org/10.1016/j.rfe.2014.08.003

1058-3300/©2014 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe