LGBT policy, investor trading behavior, and return comovement

Investors are attentive to lesbian, gay, bisexual, and transgender (LGBT) topic and a firm's adoption of LGBT-supportive policy. Using a sample of new LGBT adopters from KLD database, we show that mutual funds with a strong (weak) preference for LGBT stocks increase (decrease) their holdings in new LGBT adopters and receive more (less) capital flows when investor sentiment toward LGBT is high. We also find significant evidence that LGBT-induced trading activities lead to comovements in stock returns and share turnover. Specifically, LGBT adopters experience an increase (decrease) in return comovement with a portfolio of existing (non-) LGBT stocks. Our additional analyses based on an alternative sample from the Human Rights Campaign yield consistent results and suggest that investors consider not only the presence or lack of LGBT-supportive policy in a firm but also its LGBT performance when they make trading decisions. This research makes an important contribution to our limited understanding of the LGBT policy effect on investors, a key group of the firm's stakeholders.