Socially responsible investment funds and firm performance improvement

Abstract We examine how socially responsible investment (SRI) mutual funds emphasizing employee relations are associated with the performance of their portfolio firms, measured by return on assets (ROA). We highlight the important role of mutual-fund shareholders emphasizing employee relations by showing that firms’ ROA improves when their shares are owned by such shareholders. We find the shareholder participation of employee-focused SRI funds a potential channel leading to firm performance improvement. Our finding holds for stock return performance and is stronger in human-capital intense industries. Instrumental variable approaches using state-level constituency statutes, mutual fund inflows, or Morningstar ratings suggest a causal relation.