Beyond dichotomy: the curvilinear relationship between social responsibility and financial performance

Abstract

A central and contentious debate in many literatures concerns the relationship between financial and social performance. We advance this debate by measuring the financial–social performance link mutual funds that practice socially responsible investing (SRI). SRI fund managers have an array of social screening strategies from which to choose. Prior studies have not addressed this heterogeneity within SRI funds. Combining modern portfolio and stakeholder theories, we hypothesize that the financial loss borne by an SRI fund due to poor diversification is offset as social screening intensifies because better‐managed and more stable firms are selected into its portfolio. We find support for this hypothesis through an empirical test on a panel of 61 SRI funds from 1972 to 2000. The results show that as the number of social screens used by an SRI fund increases, financial returns decline at first, but then rebound as the number of screens reaches a maximum. That is, we find a curvilinear relationship, suggesting that two long‐competing viewpoints may be complementary. Furthermore, we find that financial performance varies with the types of social screens used. Community relations screening increased financial performance, but environmental and labor relations screening decreased financial performance. Based on our results, we suggest that literatures addressing the link between financial and social performance move toward in‐depth examination of the merits of different social screening strategies, and away from the continuing debate on the financial merits of either being socially responsible or not. Copyright © 2006 John Wiley & Sons, Ltd.

Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

“…2. This finding is somewhat supported by the findings of Barnett and Salomon (2006) who have found a similar curvilinear relationship between social responsibility and financial performance in the context of stockmarket data.…”

“…The existence of curvilinear impacts has been tested in the literature beyond EP and FP, for example, in the case of knowledge creation (Badar et al 2015) and in fairness perceptions in job satisfaction (Janssen 2001).Thus, we argue that existing levels of EP positively moderate the link between EP and FP, which implies a curvilinear (quadratic) relationship. This notion is somewhat supported by a recent study on the link between social performance and financial performance (Barnett and Salomon 2006) that found evidence for a curvilinear relationship in the context of mutual fund investments.…”

“…The curvilinear relationship can potentially account for all the three possibilities (positive, negative, or neutral) identified in the previous literature. Barnett and Salomon (2006) have identified curvilinear relationship between social responsibility and financial performance using data from stock market (mutual funds). The theory of Environmental Kuznets Curves (Stern 2004) suggests curvilinear relationships between environment improvement and performance at country level.…”

“…The moderating role of EP would imply that there is new learning and development of inimitable knowledge that helps further improving the performance. Our hypothesis is motivated by a recent study that identified similar curvilinear relationships between social responsibility and financial performance in the context of stock markets (mutual funds) (Barnett and Salomon 2006).…”

An empirical study on the interplay between semantic coupling and co-change of software classes

“…In addition, Spearman's rank correlation coefficient only assesses linear relationships but some relationships can be curvillinear (Barnett and Salomon 2006). Earlier research has shown that lack of correlation does not imply lack of causation (Howard and Maxwell 1980;Wright et al 1999;Verhulst et al 2012).…”