| dc.description.abstract | This dissertation consists of two essays on the investment of institutional investors. The first essay focuses on managers' choice on ESG investing, and examines whether mutual fund managers' pecuniary benefits can affect their decisions on ESG investment. Firstly, I find that stocks with higher ESG scores are associated with lower returns, which implies a trade-off between mutual fund ESG investment and financial performance. Next, using fund flow as an implicit incentive factor, I show that funds with greater flow-performance sensitivity invest less in high ESG firms, while funds with greater flow-ESG score sensitivity invest more in high ESG firms. Moreover, using hand-collected data of manager compensations, I provide evidence that mutual funds whose managers' compensations are explicitly linked to fund financial performance have lower ESG investment. Taken together, these findings suggest that pecuniary benefits can play a significant role in managerial decisions on ESG investment.
The second essay, coauthored with Yong Chen, examines investors' attitude toward tail risk in investment decision-making. Based on a large sample of mutual funds, we show that investor flows are significantly sensitive to tail risk in the cross-section, even after controlling for fund performance and characteristics. Using terrorist attacks and the COVID-19 as exogenous shocks to investors' fear level, we find that fund flows become increasingly sensitive to tail risk following the shocks, suggesting that fear can be a driving force of the tail risk aversion. In particular, the flow-tail risk sensitivity during the onset of the COVID-19 is about 4.5-10 times as large as that in other periods. In addition, tail risk is associated with the activeness of mutual fund investment strategies. The results are robust to alternative measures of tail risk. Overall, our findings suggest that investors care about tail risk beyond traditional risks. | en |
