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Abstract
In this paper, we investigate investment flows into mutual funds that hold more high corporate social responsible stocks (top CSR funds) vs. mutual funds that hold more low corporate social responsible stocks (bottom CSR funds). Using a large sample of equity mutual funds spanning 2003–2012, we find that top CSR funds on average receive about 5% less investment per annum compared to the other funds; whereas bottom CSR funds receive about 5.6% more investments. These relative negative and positive flows into the top and bottom CSR funds respectively were larger during the pre-financial crisis period (2003–2007). This trend, however, reversed during the financial crisis (2008–2009). Top CSR funds attracted about 8.7% more investments during the financial crisis compared to the pre-crisis period; whereas bottom CSR funds received about 9.8% less investment. This higher investment into the top CSR funds during the crisis seems to have disappeared during the post-crisis period (2009–2012). Additional analysis shows that the corporate social ratings of top CSR funds improved through the crisis, whereas it deteriorated for the bottom CSR funds. Our findings are consistent with the “flight to quality” phenomenon observed in financial markets during market crises, indicating that investors perceive top CSR fund investments as relatively safe or of higher quality and hence, invest more in them during financial crises.
Highlights
In recent years, investors’ interests in socially responsible investing (SRI) has increased significantly
Using a large sample of equity mutual funds spanning 2003–2012, we find that top corporate social responsibility (CSR) funds receive about 5% less investment per annum compared to the rest of the funds; whereas bottom CSR funds receive about 5.6% more investments
To further examine if the ‘flight to quality’ effect we found in Section 3.3 persists after the financial crisis is over, we partition the sample into three periods: pre-crisis (2003–2007), crisis (2008–2009), and post-crisis periods (2010–2012) and estimate the following regression model f lowj,t = Constant + β1 × Crisis Year × Top CSR Fundj,t−1 + β2×
Summary
Investors’ interests in socially responsible investing (SRI) has increased significantly. Lins et al (2017) show that top CSR stocks outperform bottom CSR stocks during the financial crisis They argue that investments in the corporate social activities by top CSR firms help them build trust-based relationships with their stakeholders/investors. Our findings are consistent with the “flight to quality” phenomenon overserved in financial markets during market crises: investors treat top CSR fund investments as relatively safe or of higher quality and top CSR funds attract more investments during the crises compared to normal times. To the best of our knowledge, this is the first work that studies the impact of CSR investments on mutual fund flows It provides evidence in support of the ‘flight to quality’ phenomenon observed during financial crises. The rest of the paper is structured as follows: Section 2 describes the data and the summary statistics; Section 3 presents the empirical analysis; Section 4 carries out robustness analysis; and Section 5 concludes
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