Mutual Fund Attributes and Investor Behavior

Abstract

I study the dynamics of investor cash flows in socially responsible mutual funds. Consistent with anecdotal evidence of loyalty, the monthly volatility of investor cash flows is lower in socially responsible funds than in conventional funds. I find strong evidence that cash flows into socially responsible funds are more sensitive to lagged positive returns than cash flows into conventional funds, and weaker evidence that cash outflows from socially responsible funds are less sensitive to lagged negative returns. These results indicate that investors derive utility from the socially responsible attribute, especially when returns are positive.

Is Ethical Money Financially Smart?

“…For example, Beal and Goyen (1998) report that SRI funds' investors in Australia are more likely to be female, older, and more highly educated than the investors investing in the whole universe of stocks listed on the Australian Stock Exchange. Bollen and Cohen (2005) report similar evidence for the US. To the extent that the types of investors in SRI funds are different from those investing in conventional funds, the determinants of the money-flows into and out of SRI funds and conventional funds may also differ.…”

“…Massa (2003) states that a high volatility of flows suggests that the funds' investors are myopic in making investment decisions, whereas low flow volatility implies that investors have longer investment horizons. Bollen and Cohen (2005) document that, in the US, the flow volatility is lower in SRI funds than in non-SRI funds. We contribute to this line of research by relating flow volatility to past performance and various fund characteristics.…”

“…First, we study the determinants of money-flows in the SRI fund industry in a multivariate framework. To our best knowledge, Bollen and Cohen (2005) wrote the only study on this issue, but concentrated on a univariate analysis of money-flows and past returns for US SRI funds. In contrast, we analyze the question whether or not investors chase past returns, while we study simultaneously other dimensions of the SRI decision: fund size, age, risk, the fee structure and the reputation of fund families.…”

“…managerial competence, superior corporate governance etc. (Bollen and Cohen, 2005). Second, investors in SRI funds may also derive non-financial utility by investing in companies adopting specific social, environmental or ethical policies which correspond to these investors' concerns.…”

Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations

“…In applications of this concept to socially responsible investments, a number of studies including [1,3,[6][7][8][9] claim that non-financial elements provide SRI investors with extra utility or satisfaction. In addition, as pointed out by [1,[9][10][11][12], SRI investors tend to believe that ESG factors materially affect the returns in a positive way, which, in turn, can lead to lower costs involved in the avoidance or minimization of environmental and reputational risks, and better management and better customer satisfaction that eventually impacts revenues in a positive way.…”