Socially responsible investment and fund performance: The moderating roles of mutual funds' operating environments

Mutual fund managers are increasingly inclined to demonstrate their social responsibility (SR) by adopting SR standards and integrating SR funds into investment portfolios. However, a debated question is whether the net effect of SR integration on fund performance is positive. This study proposes an inverted U-shaped relationship between SR integration and fund performance based on the trade-off between the benefits and costs associated with SR integration from the perspectives of legitimacy theory and transaction cost economics. We further hypothesise that this relationship is moderated by mutual funds' trading and regulatory environments. Our results from a sample of 1145 Chinese mutual funds support that fund performance improves with SR integration at low SR integration intensities but deteriorates as the integration increases from a medium level to a high level. Moreover, this inverted U-shaped relationship is weakened by market uncertainty but strengthened by the implementation of government-mandated SR disclosure. Our study provides practical guidance for investors, fund managers, and policymakers in striking a balance between financial performance and social responsibility. • We examine how inclusion of socially responsible stocks in mutual funds affects fund performance. • We found the effect to be positive at low SR intensities and negative at higher intensities. • Market uncertainty attenuates the inverted U-shaped link between SR integration and fund performance. • SR disclosure mandate accentuates this relationship and shifts it to the left.