@article {Filbeck79, author = {Greg Filbeck and Hunter M. Holzhauer and Xin Zhao}, title = {Using Social Responsibility Ratings to Outperform the Market: Evidence from Long-Only and Active-Extension Investment Strategies }, volume = {23}, number = {1}, pages = {79--96}, year = {2014}, doi = {10.3905/joi.2014.23.1.079}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In this article, the authors use KLD Research and Analytics (KLD) rankings from 1991 to 2009 to create three long-only portfolios: high-ranking {\textquotedblleft}Top{\textquotedblright} stocks, {\textquotedblleft}Shunned{\textquotedblright} stocks, and {\textquotedblleft}Top and Shunned{\textquotedblright} stocks. They also construct three 130/30 active-extension portfolios, with 130\% exposure in each of the three long-only portfolios and 30\% exposure in a short portfolio of low-ranking {\textquotedblleft}Bottom{\textquotedblright} stocks. The authors find positive, statistically significant abnormal returns for all six portfolios relative to their matched portfolios and the S\&P 500. In addition, they find that the three 130/30 active-extension portfolios generally outperform the three long-only portfolios, including producing higher information ratios. As predicted, the highest-performing active-extension portfolio includes stocks for both Top companies and Shunned companies. Moreover, the performance for this 130/30 active-extension portfolio increased as the long and short positions were increased to 140/40 and 150/50. Thus, the results suggest that social responsibility ratings can be actively used to outperform the market. These findings further suggest that employing active-extension strategies that short stocks for companies with low social responsibility ratings may add additional abnormal returns.TOPICS: ESG investing, security analysis and valuation}, issn = {1068-0896}, URL = {https://joi.pm-research.com/content/23/1/79}, eprint = {https://joi.pm-research.com/content/23/1/79.full.pdf}, journal = {The Journal of Investing} }