“Do ing Well While Do ing Good” Re vis ited A

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Doing Well While Doing Good Revisited: AStudy of Socially Responsible Firms Short-Termversus Long-term Performance

by Todd Shank,Associate Professor of Finance, College of Business, USF St. Petersburg,140 Seventh Avenue South, St. Petersburg, FL 33701-5016; Daryl Manullang is an In-structor of Finance, andRon Hillis Bank of America Professor of Corporate Social Re-sponsibility and Founding Dean, College of Business, University of South Florida St.Petersburg.

Abstract

This article reexamines the doing well while doing good debate within the financialmanagement literature, using comparisons among socially responsible mutual funds

(SRMF), the NYSE Composite Index, and a portfolio made up of firms most valued bySRMF managers (MostSRF). The performance of MostSRF did no better or no worse thanthe overall market or SRMF in three to five year comparisons. However, results from theten-year performance comparison refute earlier studies and indicate that the market pricessocial responsibility characteristics in the long run. Given MostSRF outperformed theother two indices in this timeline, a new paradigm for understanding the impact of SRI isrevealed.

Key words:social responsibility; financial performance; portfolio management

Introduction

Several generations of finance students have been educated under the assumption that theprimary duty of a public organizations management is to maximize stockholder wealth byincreasing the value of its common stock (Brigham, Gapenski, & Ehrhardt, 1999). None-the less, an es sen tial ques tion re mains: How do we balance so cial concerns against theneed to create value for our shareholders? (p. 3).

This query increasingly became prominent following the 1962 challenge by MiltonFriedman that a corporations social responsibility is to make a profit (Griffin & Mahon,1997, p.5). However, its pervasive application within society coincided with the baby-boomers coming-of-age, a generational cohort that some analysts predicted would allowtheir value systems to influence their investment choices (Martin, 1986). One outcome has

been the rise of socially responsible investing or SRI, which increased by nearly 200percent in the late 1990s (Spencer, 2001) and now represents 10 percent of all investmentdollars in the United States (Sauer, 1997). SRIs mainstream accep tance was solidified bythe addition of the Domini Social Equity Fund to 401 (k) plans of companies such as Hew-lett Packard, Ford, and The Gap, along with municipalities including the city of New Yorkand the state of Massachusetts (Spencer, 2001). Total investment surpassed $2 trillion bythe end of the millennium, with assets in socially responsible mutual funds (SRMF) reach-ing about $1.5 trillion (Stone, 2000).

More recent history notwithstanding, the use of SRI predates the investment strate-gies of the baby-boom generation. For example, some investors at the turn of the previous

century stayed away from firms involved with sin products such as alcohol, tobacco, and

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gambling (Sauer, 1997). By the 1940s, SRI increasingly became visible when governmentagencies and unions shunned investment opportunities in organizations deemed to haveunfair labor practices (Martin, 1986). SRI also experienced significant expansion duringthe turbulent portion of the 1970s as a consequence of the Vietnam War, urban strife, andApartheid. Its modern-day growth was complete as socially responsible investors enlarged

their concerns to encompass the environment, weapons production, product safety,womens issues, and the local community (Martin, 1986; Sauer, 1997).

Hamilton, Jo, and Statman (1993, p. 65) aptly describe SRI as a way for individualinvestors to integrate money into ones self and into the self one wishes to become. As aresult, socially responsible investors select stocks or mutual funds that are consonant withtheir core values, hoping to send a positive signal to amenable organizations and a distresssignal to companies out of compliance. All the same, shareholders still demand an accept-able gain on their investments over time. As Martin (1986, p.33) notes, No one wants toinvest in anything thats morally irresponsible. But people want to make money. Youwont get that many do-gooders to invest if they cannot make a fair return.

The remainder of this paper is organized as follows. The subsequent section presentsa literature review that examines theoretical rationales to guide socially responsible inves-tor behavior, social responsibility screens employed by investors and fund managers, andresearch on the performance of socially responsible portfolios. The next section contains a

brief narrative of the method used to select the individual socially responsible firms thatform the basis of comparison in this study. Then, data, analyses, and results are described,and a new paradigm for understanding the impact of SRI is revealed.

Review of the Literature

There are as many perspectives of socially responsible investing as there are options for in-vestors. For example, some finance scholars question the wisdom of using personal valuesto guide investment strategies. Their concern is particularly appropriate in markets wherecorporations can voluntarily choose notto incur the additional costs associated with be-having in a socially responsible manner, thus improving their ability to attract capital rela-tive to their more SR counterparts (see Brigham, Gapenski, & Ehrhardt, 1999). On theother hand, firms that operate responsibly may en gender goodwill and build stakeholderloyalty, creating a sustainable competitive advantage that can be promoted to advance thevaluation of the firm (Sauer, 1997). Of course, a third option contends that equity marketsare so vast, liquid, and ef fi cient that it really does not matter whether social screening is

performed when selecting firms for investment portfolios (Diltz, 1995, p.64).

Social Responsibility Screens

Regardless of these diverse perspectives, the growth of SRI, especially during the lasttwenty years, is undeniable. Most of this expansion has been with socially responsible mu-tual funds, which purport to offer investors opportunities that meet value-based as well asfinancial criteria (Stone, 2000). John Rekenthaler of Morningstar defined Socially Re-sponsible Mutual Funds (SRMF) as funds that impose major socially conscious con-straints on their investment practices (Statman, 2000, p.32). However, the wide variety ofscreens that are applied means the definition of social responsibility varies greatly, sug-

gesting that one persons taboo is another persons sacred cow (Statman, 2000, p. 31).

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As a consequence of this variability, SRMF differ significantly in the industries andfirms represented by their investments. Most of these policies are exclusionary in nature,and function to eliminate corporations from consideration that engage in certain activitiesor par ticipate in spe cific markets. For example, the Social Invest ment Fo rum revealed that84 percent, 72 percent, 69 percent, and 68 percent of SRMF exclude from their portfolios

firms associated with tobacco, gambling, weapons production, and alcohol, respectively(Statman, 2000). Within recent years, SRMF have adopted inclusionary policies that seekout organizations that operate in a preferred manner. Exemplars include concern for theenvironment, human rights, and animal welfare (Spencer, 2001). Of course, these policiesalso examine the potential for a fair return on investment dollars.

While these criteria may work well in the ory, their initial application for screeningpurposes and their monitoring over time is fraught with difficulties. The essential questionis whether investors have access to sufficient information to be able to appropriatelyprice socially responsible actions and policies of public firms. Cloninger et al. (2000)note:

there are a number of reasons that limit market access to infor mation nec es-sary for the efficient pricing of ethical and unethical behavior. These reasons re-late to residual agency costs, costly and asymmetric information, competitivereasons for non-disclosure, asymmetric focus of the press on unethical versusethical behavior, bounded investor rationality, and the refusal by consumers andinvestors to pay for ethical behavior lacking the penalties associated with illegal

behavior.

Recent evidence finds that few reliable sources of data exist to aid portfolio manag-ers in the decision-making process regarding compliance or lack of compliance by corpo-

rations with socially responsible standards. Accordingly, there is no such thing as aclean company meeting all the requirements of an ethi cal in vestment fund (Martin,1986, p.33).

Relative Performance of Socially Responsible Mutual Funds

Regardless of these caveats, much re search has been conducted to in ves ti gate the per form -ance of SRMF in relation to other investment opportunities. Sauer (1997) finds that previ-ous evidence is mixed, providing no real indication as to the relative potential of thesevalues-based investments. Reyes and Grieb (1998) present studies reporting on stocks sub-

jected to so cial screens that reveal performance levels be low the S&P 500 during the late

1980s, while outperforming the broader market by the early 1990s. Such findings ledauthors such as Griffin and Mahon (1997, p.6) to conclude: Although numerous research-ers have explored the empirical relationship between corporate social performance andcorporate financial performance, no definitive consensus exists.

These inferences notwithstanding, much of the primary research presented in recentliterature triangulate around the same conclusion that social screening appears to have lit-tle, if any, effect on portfolio returns (Diltz, 1995, p.66). The findings of Hamilton, Jo,and Statman (1993) are consonant with these results, showing that SRMF performed aswell as conventional funds. Guerard (1997) examined month-by- month returns ofscreened and unscreened portfolios for an eight-year period beginning in the late 1980s,

and they found no significant differences between them. Reyes and Grieb (1998) added a



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risk-adjusted dimension to their analysis, and once again found no real differences be-tween SRMF and other matching funds.

Statman (2000) advanced one of the most rigorous investigations in the current lit-erature, comparing the performance of the Domini Social Index (DSI) with the S&P 500

during the 1990s as well as a set of SRMF with conventional funds of similar asset size us-ingJensens Alpha(discussed in next section). While the broader market bested the DSI inrisk-adjusted returns, the average gain of SRMF was better than their conventional ri-vals. How ever, in neither case were these dif fer ences statistically significant, leading theauthor to conclude that his results give investors little reason for either delight or alarm(Statman, 2000, p.30).

This lack of compelling evidence has led to several disparate implications for the fi-nancial management community. Consistent with his previous remarks, Statman (2000)contends that socially responsible investing has few downside risks relative to traditionalinvestment strategies. On the other hand, Sauer (1997) believes that these findings repre-

sent a positive sign for values-based investing that indicates investors can follow their be-liefs without sacrificing performance. A final perspective contends this researchdemonstrates that acting responsibly is not priced in the market, suggesting that SRI haslittle impact beyond making investors feel good (Reyes & Grieb, 1998).

One shortcoming of prior studies of the performance of socially responsible mutualfunds is that none considers the most recent five years (1998-2003), which included alengthy bear market in stocks. In addition, all of them used performance data periods ofless than ten years, leaving the issue of longer-term socially responsible investment per-formance unstudied. Finally, dissimilarities among the screening methodologies used bySRMF to select socially responsible firms suggest a need for a uniform approach to deter-

mining individual, socially responsible U.S. corporations for inclusion in a portfolio. Thisstudy examines the performance of a portfolio comprised of the firms most valued by port-folio managers of SRMF. The purpose of the study is to determine if the market prices thesocial performance of those corporations observed to be leaders in social responsibility.

Data and Methodology

The purpose of this research is to extend the discussion of doing well while doing goodthrough a comparison of the performance of a portfolio of selected individual firms widelyrecognized as socially responsible to that of professionally managed mutual funds guided

by so cial responsibility as well as to broader market indicators such as the NYSE Compos-

ite Index. The choice of the eleven firms discussed below was based on the analy sis ofHill, Stephens, and Smith (2003), who selected the firms that comprise our portfolio ofmost socially responsible firms.

The first step in selecting the eleven firms was to choose from among the sociallyresponsible mutual funds listed by the Social Investment Forum (SFI, see www.socialinvest.org). The Social Investment Forum is a national non-profit membership orga-nization promoting the concept, practice, and growth of socially responsible investing. Fo-cus was placed on large cap growth funds with net assets under management of at least$15,000,000. The twelve SRMF that met these criteria included Acquinas Growth, Ameri-can Trust Allegiance, Calvert Social Investment Equity A, Citizens Core Growth A,

Devcap Shared Return, Domini Social Equity A, Dreyfus Premier 3rd Century A, Green



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Century Equity, MMA Praxis, Neuberger Berman S. R. A, Parnassas Fund, and WaldenSocial Equity.

Table I con tains the so cially responsible screening criteria used by the se lected mu -tual fund companies. These screens result in both inclusionary and exclusionary practices.

For example, the Parnassas Fund looks for companies that make positive investments inthe communities in which they do business while the Walden Social Equity Fund restrictsinvestments in companies whose policies negatively impact the neighborhoods in whichemployees work and live. Consistent with previous discussion, these SRMF generally do


Table ISocially Responsible Screening Criteria

Source: Hill, Stephens and Smith (2003)


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not invest in firms that make products involving abortion, alcohol, gambling, weapons,pornography or tobacco. They lean toward companies that support indigenous rights, theenvironment, and positive local relationships.

The second step involved comparing the top ten stock holdings of these funds. Any

holding owned by at least 1/3rd of the selected funds was included in a list of exemplarysocially responsible organizations that were used for further analysis. The followingeleven companies were identified: American International Group, Bank of America,Cisco, Coca Cola, Fannie Mae, Intel, Johnson and Johnson, Merck, Microsoft, Pfizer andProctor & Gamble. Table II provides information on the lines of business of the focal com-

panies along with excerpts from their published mission statements and credos. Althoughall are well known for their socially responsible behavior, they each have unique corporatevalues. For instance, Intel is committed to youth education while Cisco wants to leveragethe Internet for the betterment of society. Fannie Maes focus is on helping lower incomefamilies re al ize their dream of home own ership while Merck strives to use their re sourcesto provide society with products that will improve the overall quality of life.

Table IIOverview of Individual Firms

Company Business Description Mission / Credo / Values

AmericanInternationalGroup

Insurance and financialservices

Not available

Bank ofAmerica

Banking Committed to community development, environment,helping children with their special needs.

Cisco Networking products for theInternet

We develop, support, and in vest in programs that lev er agethe Internet to con trib ute to lasting positive change. Wefocus on educa tion, ba sic needs, and increased civicengagement.

Coca Cola Manufacturer, marketer, anddistributor of nonalcoholicbeverage concentrates andsyrups

We will adhere to the highest ethi cal standards, knowingthat the quality of our products, the integrity of our brandsand the dedication of our people build trust and strengthenrelation ships. We will serve the people who enjoy ourbrands through innovation, superb customer service, andrespect for the unique cus toms and cultures in thecommuni ties where we do busi ness.

Fannie Mae Providing financial productsand services that make itpossible for low-, moderate-,and middle- income familiesto buy homes of their own

We relentlessly seek to maintain, enhance, and expandFannie Maes diversity, community outreach, work/lifebalance, employee development, and volunteer programsand initiatives. Were committed to having a positiveimpact on our employees, our com munity, and the nationwe serve all by doing business responsibly.

Intel Manufacturer ofmicro processors

Intel values education indicated through our financial,tech nical and staff support of a variety of educationprograms promoting science, math, engineering andtechnology.

Johnson &Johnson

Manufacturer and marketerof health care products

We are re sponsible to our em ployees, the men and womenwho work with us throughout the world. Everyone mustbe considered as an individual. We must re spect theirdignity and recognize their merit.They must have a sense of security in their jobs.Compensation must be fair and adequate, and workingcon ditions clean, orderly and safe. We must be mind fulof ways to help our employ ees fulfill their familyresponsibilities.



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Merck Merck discovers, develops,manufactures and markets abroad range of in novativeproducts to improve humanand animal health

The mission of Merck is to provide soci ety with supe riorproducts and services innovations and solutions thatimprove the quality of life and satisfy customer needs to pro vide em ployees with mean ing ful work andadvancement opportunities and investors with a superiorrate of re turn.

Microsoft Developer and marketer ofcomputer operating systemsand applications

There are two key aspects to Microsofts past and futuresuccess: our vi sion of tech nol ogy and the values that welive by every day as a company. To reflect our role as anindustry leader and to fo cus our efforts on theopportu nities ahead, we have embraced a new corporatemission: To enable people and businesses throughout theworld to realize their full potential.

Pfizer Pfizer Inc is aresearch-based, globalpharmaceutical company

We will become the worlds most valued company topatients, customers, colleagues, investors, businesspart ners, and the communities where we work and live.

Proctor &Gamble

Manufacturer and marketerof soaps and other con sumerproducts.

P&G people are committed to serving con sumers andachieving leadership results through principle-baseddeci sions and ac tions.

Source: Hill, Stephens and Smth (2003)

Various techniques exist to evaluate the performance of portfolio assets. Followingthe lead of Hamilton, Jo and Statman (1993), our research evaluated portfolio returns ad-

justing for risk using the Jensens Portfolio Technique. This tool evaluates asset portfoliosbased on their relative and absolute performance (Moses, 1989) and provides a measure ofexcess returns for each mutual fund. The risk adjusted excess returns are represented byJensens (1968) Alpha:

E(RiRf)=i+i[E(RmRf)] + i

whereRmis the monthly return on the NYSE Composite Index andRfis the monthly return

on the three month U.S. Treasury bill (Hamilton, Jo, and Statman, 1993).

Large-cap, socially responsible mutual funds were identified using Social Invest-ment Forum categorizations. Monthly returns were obtained from Yahoo finance.com, in-cluding dividend values for each of the funds and individual firms for the period from June1993 to May 2003. Accordingly, SIF categorized forty-five mutual funds as large cap. Ofthese, only thirty-one possessed at least 3 years of performance history and only five SRmutual funds were established at least 10 years prior.

The stock values of each of the eleven se lected socially responsible firms were usedto create the Most-Socially-Responsible Fund (MostSRF), a portfolio of supra-socially re-

sponsible assets. The individual assets represent equally weighted concerns within the cre-ated portfolio, with returns for all portfolios calculated using the following formula:

Rt= [Vt+1 Vt+D0t] / Vt

whereRtis the portfolio return at time t, Vt+1 is the portfolio value at the end of the holdingperiod, andD0trepresents any dividend payout during the period t.

We calculated Jensens Al pha, separately, for sev eral port fo lios ([1] MostSRF, [2] asample of SRMF, and [3] all NYSE stocks) in order to see if any were able to provide ex-cess returns for one or more of three sub-periods. These sub-periods represent three-, five-,and ten-year performances of all portfolios. Our expectation, given prior research dis-

cussed in the literature review, is that no sig nificant excess returns were earned by the so-



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cially responsible port fo lios since value ex pressive fea tures are not priced in ef ficientmarkets. However, It may be that these eleven firms represent a better example of so cialresponsibility and as a group make for a truer comparison (Hill, Stephens, and Smith,2003, p.362). Special focus was placed on the ten-year performance of the MostSRF to de-termine if evidence supports the theory that being socially responsible is a long-term value

maximizing strategy for major U.S. corporations.

Results

The re gres sion results for all portfo lios recent three-year per formances are presented inTable III. The most portfolios were examined for this first sub-period since many SRMFexist with at least a three-year history of return data. The excess returns of 29 of the 31 mu-tual funds (all but one, negative) are not statistically different from zero at the 95% level.Two funds, the Dreyfus Premier Third Century R and the Noah Fund, provided returnsthat were negative and statistically significant. Annualized returns were -22.1% and-24.8% respectively. The three-year performance for MostSRF, although negative like the

rest of the market, was not shown to be statistically dif ferent than the market.

Table IIIExcess Returns Estimated on Monthly Returns: June 2000- May 2003

FUND MonthlyExcessReturn

T-statistic

AnnualizedExcessReturn

AdjustR2

N

American Trust Allegiance ATAFX -0.0182 -1.618 -21.79% 0.1152 -0.0234 36

Aquinas Growth AQEGX -0.0034 -0.525 -4.77% 0.2716 0.0394 36

Aquinas Value AQEIX -0.0061 -0.644 -7.32% 0.2940 0.0230 36

Bridgeway Ultra Large 35 Index BRLIX -0.0104 -1.126 -12.43% 0.1230 -0.0195 36

Cal vert Large Cap Growth I CLCIX -0.0074 -0.648 -8.90% 0.2983 0.0144 30

Calvert Social Investment Eq A CSIEX -0.0003 -0.034 -0.37% 0.2078 -0.0008 36

Calvert Social Investment Eq C CSECX -0.0010 -0.105 -1.16% 0.2080 -0.0010 36

Calvert Social Investment Eq I CEYIX -0.0004 -0.036 -0.45% 0.2960 0.0265 28

Citi zens Core Growth A WAIDX -0.0158 -1.304 -18.22% 0.1929 -0.0139 36

Citi zens Core Growth I WINIX -0.0143 -1.210 -17.11% 0.1961 -0.0137 36

Citizens Value (Meyer's Pride Val) MYPVX -0.0070 -0.485 -8.34% 0.3333 0.0008 36

DEVCAP Shared Return DESRX -0.0121 -1.322 -14.56% 0.2767 0.0203 36

Domini Social Equity A DSEFX -0.0133 -1.337 -15.95% 0.1559 -0.0155 36

Domini Social Equity I DIEQX -0.0133 -1.376 -15.93% 0.1985 -0.0056 36

Dreyfus Premier Third Cen tury A DTCAX -0.0166 -1.410 -19.86% 0.1890 -0.0148 35

Dreyfus Premier Third Cen tury B DTCBX -0.0172 -1.505 -20.61% 0.1888 -0.0140 36



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Dreyfus Premier Third Cen tury C DTCCX -0.0172 -1.506 -20.62% 0.1879 -0.0141 36

Dreyfus Premier Third Cen tury R DRTCX -0.0184 -1.708 -22.08% 0.1712 -0.0151 36

Dreyfus Premier Third Cen tury T DTCTX -0.0169 -1.479 -20.24% 0.1948 -0.0129 36

Dreyfus Premier Third Cen tury Z DRTHX -0.0164 -1.444 -19.73% 0.1891 -0.0138 36

Green Century Equity GCEQX -0.0127 -1.270 -14.93% 0.1787 -0.0107 36

MMA Praxis Core Stock MMPGX -0.0078 -1.046 -9.32% 0.1109 -0.0168 36

Neuberger Ber man Soc Resp Inv NBSRX -0.0034 -0.366 -4.07% 0.0723 -0.0259 36

Noah Fund NOAHX -0.0207 -1.734 -24.81% 0.1140 -0.0242 36

Parnassus Equity Income PRBLX 0.0024 0.282 2.94% 0.0967 -0.0224 36

Parnassus Fund PARNX -0.0016 -0.093 -1.87% 0.2424 -0.0176 36

Security Social Awareness A SWAAX -0.0112 -1.179 -13.44% 0.1691 -0.0115 36

Security Social Awareness B SWABX -0.0112 -1.254 -14.32% 0.1693 -0.0116 36

Sierra Club Stock Fund SCFSX -0.0035 -0.264 -4.20% 0.2427 0.0060 36

Walden Social Equity Fund WSEFX -0.0039 -0.533 -4.72% 0.1394 -0.0094 36

Women's Equity FEMMX -0.0023 -0.359 -3.35% 0.1437 -0.0102 36

S.R. Portfolio 3 Years [36 mo] -0.0030 -0.451 -3.61% 0.0223 -0.0288 36

*Annual excess return: Monthly excess returns x 12

The re gres sion results for all portfo lios recent five- year per formance are re ported inTable IV. For this second sub-period, twenty-one SRMF had at least a five-year history ofreturn data. None of the SRMF examined provided significantly different returns from themarket index. The MostSRF during this period also was not significantly different fromthe market index and re flected a t-statistic of nearly zero. Results in dicate no market pric -ing of value expressive features of the corporations comprising these portfolios.

Table IVExcess Returns Estimated on Monthly Returns: June 1998 - May 2003


T-statistic ExcessReturn(% peryear)

AdjustR2 N

American Trust Allegiance ATAFX -0.0031 -0.324 -3.72% 0.0578 -0.0176 55

Aquinas Growth AQEGX -0.0107 -1.465 -12.84% 0.0608 -0.0146 60

Aquinas Value AQEIX -0.0027 -0.370 -3.28% 0.1363 -0.0045 60

Bridgeway Ultra Large 35 Index BRLIX

Cal vert Large Cap Growth I CLCIX

Calvert Social Investment Eq A CSIEX 0.0030 0.412 3.65% 0.1312 -0.0053 60

Calvert Social Investment Eq C CSECX 0.0023 0.304 2.70% 0.1293 -0.0058 60



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Calvert Social Investment Eq I CEYIX

Citi zens Core Growth A WAIDX -0.0051 -0.580 -6.09% 0.0849 -0.0137 60

Citi zens Core Growth I WINIX -0.0046 -0.517 -5.46% 0.0831 -0.0139 60

Citizens Value (Meyer's Pride Val) MYPVX -0.0018 -0.189 -2.20% 0.2440 0.0045 57

DEVCAP Shared Return DESRX -0.0044 -0.600 -5.26% 0.1529 -0.0008 60

Domini Social Equity A DSEFX -0.0048 -0.629 -5.80% 0.0776 -0.0134 60

Domini Social Equity I DIEQX -0.0050 -0.657 -5.96% 0.1012 -0.0104 60

Dreyfus Premier Third Cen tury A DTCAX

Dreyfus Premier Third Cen tury B DTCBX

Dreyfus Premier Third Cen tury C DTCCX

Dreyfus Premier Third Cen tury R DRTCX

Dreyfus Premier Third Cen tury T DTCTX

Dreyfus Premier Third Cen tury Z DRTHX -0.0086 -1.052 -10.30% 0.0877 -0.0129 60

Green Century Equity GCEQX -0.0044 -0.580 -5.31% 0.0890 -0.0121 60

MMA Praxis Core Stock MMPGX -0.0076 -1.200 -9.12% 0.0024 -0.0172 60Neuberger Ber man Soc Resp Inv NBSRX -0.0038 -0.537 -4.55% 0.0398 -0.0160 60

Noah Fund NOAHX -0.0072 -0.704 -8.58% 0.0088 -0.0175 59

Parnassus Equity Income PRBLX 0.0036 0.547 4.34% 0.0510 -0.0150 60

Parnassus Fund PARNX 0.0098 0.791 11.77% 0.1991 -0.0075 60

Security Social Awareness A SWAAX -0.0053 -0.751 -6.39% 0.0448 -0.1750 55

Security Social Awareness B SWABX -0.0062 -0.866 -7.39% 0.0432 -0.0176 55

Sierra Club Stock Fund SCFSX

Walden Social Equity Fund WSEFX

Women's Equity FEMMX -0.0016 -0.239 -1.92% 0.0483 -0.0153 60

S.R. Portfolio 5 Years [60 mo] 0.0000 0.001 0.01% -0.0006 -0.0172 60


The regression results for all portfolios recent ten-year performance are reported inTable V. For this third sub-period, only five SRMF had a ten-year history of return data.Although none of the five provided a significantly different return from the market index,all provided positive returns for this long-term horizon. However, the eleven firmsrepresenting the MostSRF provided a return that was both positive and significant. At anannualized 15% return, the MostSRF would have yielded socially responsible investorswith an excess return beyond the general market index and out performed the established

professionally managed SRMF.Table V

Excess Returns Estimated on Monthly ReturnsJune 96 - May 03/June 93 - May 03


T-statistic

ExcessReturn(%per year)

AdjustR2

N

American Trust Allegiance ATAFX

Aquinas Growth AQEGX

Aquinas Value AQEIX

Bridgeway Ultra Large 35 Index BRLIX

Cal vert Large Cap Growth I CLCIX



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Calvert Social Investment Eq A CSIEX 0.0049 0.389 5.89% -0.632 -0.0117 84

Calvert Social Investment Eq C CSECX

Calvert Social Investment Eq I CEYIX

Citi zens Core Growth A WAIDX

Citi zens Core Growth I WINIX

Citizens Value (Meyer's PrideVal)

MYPVX

DEVCAP Shared Return DESRX

Domini Social Equity A DSEFX 0.0063 0.502 7.59% -1.113 -0.0106 84

Domini Social Equity I DIEQX

Dreyfus Premier Third Cen tury A DTCAX

Dreyfus Premier Third Cen tury B DTCBX

Dreyfus Premier Third Cen tury C DTCCX

Dreyfus Premier Third Cen tury R DRTCX 0.0036 0.313 4.37% -1.199 -0.0070 120

Dreyfus Premier Third Cen tury T DTCTX

Dreyfus Premier Third Cen tury Z DRTHX

Green Century Equity GCEQX

MMA Praxis Core Stock MMPGX

Neuberger Ber man Soc Resp Inv NBSRX

Noah Fund NOAHX

Parnassus Equity Income PRBLX 0.0092 0.903 11.06% -1.803 -0.0056 84

Parnassus Fund PARNX 0.0205 0.986 24.63% -2.152 -0.0099 84

Security Social Awareness A SWAAX

Security Social Awareness B SWABX

Sierra Club Stock Fund SCFSX

Walden Social Equity Fund WSEFX

Women's Equity FEMMXS.R. Portfolio 10 Years [120 mo] 0.0126 2.945 15.08% -0.0556 0.0063 120


Summary and Interpretation

The three- and five-year performance results of our study lend support to earlier investiga-tions by scholars such as Hamilton, Jo, and Statman (1993) and Statman (2000), whichconcluded that the performance of SRMF is not significantly different from the universe ofother managed portfolios. Even the inclusion of data from the MostSRF for both the three-and five-year periods provided no statistically significant excess return beyond the market

in general as measured by Jensens alpha. This means that the perform ance of firms identi -fied as socially responsible by a preponderance of professional money managers did no

bet ter than the overall market.

The lack of any sig nificant short-term per formance differ ences from the gen eralmarket re in forces the be lief that lit tle fi nancial benefit can be obtained by in vestors se lect -ing our supra-set of socially responsible investments in the short run. These results alsosupport Statmans assertion that market forces do not price socially responsible character-istics in the short run and that these characteristics appear to be included in the market risk

premium defined in CAPM. However, it is also implied that, although investors dedicatedto socially responsible investing may not realize additional financial returns, they will not

be economically penalized for their investment philosophy.



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However, the results from the group of eleven firms (MostSRF) ten-year perform-ance tend to re fute these ear lier stud ies and in dicate that the market prices social re sponsi -

bility characteristics in the long run. Specifically, the Jensens alpha for the port folioconstructed of the eleven supra-socially responsible firms is positive and significant. Thismeans that the long-term performance of the firms identified as socially responsible by a

preponderance of professional money managers was better than the overall market. Com-para tively, the five SRMF evaluated in this research failed to provide a sig nificant andpositive alpha during the same period.

Sev eral impli cations of these findings are rele vant for financial ana lysts. First, ana-lysts may want to consider forming new portfolios for their clients by selecting individualfirms identified as socially responsible by a majority of SRMF managers. It seems likelythat the level of financial disclosure required of corporations will grow as a result of added

public scrutiny and regulations, increasing public access to information necessary for effi-cient pricing of socially responsible behavior. Logically, this may lead to greater aware-ness of corporate social responsibility among investors, increasing their interest and

investment in firms with widely recognized reputations for social responsibility. Second,the superior long-term performance of the MostSRF portfolio supports basic financial the-ory which asserts that a firms socially responsible ac tions are priced by the market andlead to superior long-term financial performance, maximizing shareholder wealth. It isquite possible that a firm must establish a history of noteworthy socially-sanctioned be-havior before investors recognize this performance and vote appropriately with their in-vestment dollars. Most financial analysts recognize the value of long-term investing, andthey may now suggest to their clients that doing well while doing good operates withinthe same time ho ri zon.

Endnote

The prior studies with their corresponding data periods are; [1] Hamilton, Jo, and Statman(1993): 1981-1990, [2] Gifford and Mahon (1997):1987-1994, [3] Reyes and Gibb (1998):1986-1995, [4] Statman (2000): 1990-1998.



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Cloninger, D., Aggarwal, R., Karpoff, J., Lacey, N., and Smith, C. (2000). Doing Well byDoing Good: Do Financial Markets Price Ethical Behavior?Financial Practice and Edu-cation, (Fall/Winter), pp.24-33.

Diltz, J. D. (1995). Does social screening affect portfolio performance?Journal of Invest-ing, 4 (Spring), pp.64-69.

Griffin, J. J., & Mahon, J.F. (1997). The corporate social performance and corporate finan-cial performance debate: Twenty-five years of incomparable research.Business and Soci-

ety, 36 (March), pp.5-31.

Guerard, J. B. (1997). Is there a cost to being socially responsible in investing?Journal ofInvesting, 6 (Summer), pp.11-18.

Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investmentperformance of socially responsible mutual funds. Financial Analysts Journal, 49 (No-vember/December), pp.62-66.

Hill, R., Stephens, D., and Smith, I. (2003). Corporate Social Responsibility: An Examina-tion of Individual Firm Behavior.Business and Society Review, 108 (3), 339-364.

Jensen, M. (1968). The performance of mutual funds in the period 1945-1964.Journal ofFinance,23 (May), pp.389-415.

Martin, J. (1986). Happy returns for do-gooders.Financial World, March 18, pp.32-33.

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Reyes, M. G., & Grieb, T. (1998). The external performance of socially-responsibt le mu-tual funds.American Business Review, 16 (1), pp.1-7.

Sauer, D. A. (1997). The impact of sociallyresponsible screens on investment perform-ance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Fund.Re-view of Financial Economics, 6 (2), pp.137-149.

Spencer, R. C. (2001). Assets in socially screened investments grew by 183%.EmployeeBenefit Plan Re view, 56 (August), pp.30-32.



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Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal,May/June, pp.30-39.

Stone, B. A. (2001). Corporate social responsibility and institutional investment.Businessand Society, 40 (1), pp.112-117.

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