It is generally assumed that common stock investors are exclusively interested in earning the highest level of future cash flow for a given amount of risk. This view suggests that investors select a well-diversified portfolio of securities to achieve this goal. Accordingly, it is often assumed that investors are unwilling to pay a premium for corporate behavior that can be described as socially responsible. Under the traditional view, to the extent that corporations engage in costly behavior to achieve socially responsible goals that cannot be translated into higher cash flow in the future, investors would be expected to place a lower value on corporate securities.

Recently, this view has been under increasing attack. Apparently, many investors, including both large institutional investors and individual investors, are concerned about a much larger set of corporate priorities. According to the Social Investment Forum, at least 538 institutional investors now allocate funds using social screens or criteria. For example, the Teachers Insurance and Annuity Association and College Retirement and Equities Fund, with assets of about $9 billion, uses corporate social responsibility (CSR) performance as an additional screen in making investment decisions. In addition, there are now numerous mutual funds that are designed to satisfy the demands of socially responsible investors. A study by the United States Trust Company of Boston conservatively estimated that at the end of 1985 about $100 billion in funds were managed under at least one form of social criteria. Mitchell Investment Management, using a less . . .