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Abstract Socially responsible investors apply both financial and social criteria when evaluating investments in order to ensure that the securities selected are consistent with their personal value system and beliefs. This paper examines the potential impact these additional restrictions have on investment performance by comparing the performance characteristics of a carefully constructed, well diversified portfolio of socially screened stocks with two unrestricted benchmark portfolios. In contrast to prior research, the performance of the socially responsible portfolio examined in this paper is not subject to the confounding effects of trans‐ action costs, management fees, or differences in investment policy that are associated with actively managed mutual funds. Therefore, it is possible to more clearly isolate the potential performance implications associated with subjecting the investment opportunity set to social screening. Contrary to expectations, our findings indicate that application of social‐responsibility screens does not necessarily have an adverse impact on investment performance.
David A. Sauer (Wed,) studied this question.