Socially responsible mutual fund exit decisions
| Published date | 01 January 2020 |
| Author | María Vargas,Fernando Muñoz,Mercedes Alda |
| Date | 01 January 2020 |
| DOI | http://doi.org/10.1111/beer.12253 |
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wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:82–97.
© 2019 John Wiley & Sons Ltd
1 | INTRODUCTION
The socially re sponsible inves tment (SRI) indu stry has exp erienced
important g rowth in recent ye ars. The USSIF ( 2018) report poin ts
out that susta inable, respo nsible, and impa ct investing as sets now
account for $12.0 trill ion of the $46.6 tril lion total assets und er man‐
agement in the Unit ed States. This represe nts a 38 per cent increase
from 2016. Moreover, the ES G (environmenta l, social, and gove r‐
nance) assets under management in 780 alternative investment ve‐
hicles, inclu ding different typ es of funds, reached $588 bi llion at the
beginning of 2018. Th is is nearly three times th e assets identified in
2016. This impor tant growth of so cially respon sible (SR) funds h as
attracte d the interest of the financial lit erature. The papers analys‐
ing this kind of fun ds can be categor ized into two broad g roups: (i)
those analysin g financial pe rformance an d managerial ski lls and (ii)
those study ing the SR fund investors’ be haviour.1
Despite the imp ortant numb er of article s on SR mutual fun ds,
some relevant top ics remain unexplored. Th is is the case of SR mu‐
tual fund exit de cisions, that is , liquidations an d mergers. Mut ual
fund liquidati ons and mergers have been analys ed for conventional
funds (Jayaraman, Khorana, & Nelling, 2002; Khorana, Tufano,
& Wedge, 2007; Zhao, 200 5), hedge funds (Kolo kolova, 2011),
exchanged trad e funds (ETFs) (She rrill & Stark, 2 018), and pension
funds (Alda , 2018), but, as far as we know, no pr ior studies have dealt
with this topic in re lation to SR mutual funds. Ho wever, these funds
also experien ce failure and mergin g processes in spite of th eir radical
increase and relative youth.
In the case of convent ional funds, t he previous liter ature has
found that the ex it likelihood is gre ater for funds show ing poor fi‐
nancial result s and lower net flows (Jayar aman et al., 2002; Khor ana
et al., 2007; Zhao, 20 05). The profits of mutual fun d companies de‐
pend on the tota l net assets mana ged; thus, mutua l funds that are
not able to attr act fund flows r epresent an unn ecessary co st for
these firms . For this reason, mutual fund co mpanies decide to elim‐
inate them and gai n efficienc y. This phenomeno n occurs becau se
conventional mut ual fund investor s are return chasers (Friesen &
Sapp, 2007); t hat is, they prefer to invest in funds t hat have shown
good financial o utcomes in the past.
SR mutual funds d iffer from conve ntional ones in t hat the for‐
mer consider bot h financial and n on‐financial issu es in their invest‐
ment decisions. T hus, this type of fund s is targeted to investors wh o
are sensitive to no n‐financial issues, such as the env ironmental and
social impac ts of economic ac tivity. Severa l papers in the f inancial
literature have pr eviously found t hat fund flows in th e SR mutual
Received: 9 Apr il 2019
|
Revised: 18 Octob er 2019
|
Accepted: 22 Octo ber 2019
DOI: 10.1111/beer.12253
ORIGINAL ARTICLE
Socially responsible mutual fund exit decisions
MercedesAlda | Fernando Muñoz | María Vargas
Departamento de Contabilidad y
Finanzas, Un iversidad de Zar agoza,
Zaragoza, Spain
Correspondence
Fernando Muñoz, Departamento de
Contabilidad y Finanzas, Universidad de
Zaragoza, C/ G ran Vía, 2, 500 05, Zaragoza,
Spain.
Email: fmunoz@unizar.es
Funding information
Universida d de Zaragoza and Funda ción
Ibercaja, Grant/Award Number: JIUZ‐2018‐
SOC‐13 (268‐249); Aragon Governm ent,
Grant/Award Num ber: S38_17R CIBER
Análisis Económico‐Financiero de l;
Ministerio d e Ciencia, Innovac ión y
Universidades, Grant/Award Number:
RTI2018‐093483‐B‐I00
Abstract
This paper studie s, for the first time, socially resp onsible (SR) mutual fund exits. We
analyse a sample of 53 4 U.S. SR equity m utual funds in the pe riod 2003–2017, in
which 182 exit events occurr ed (53 liquidations, 109 merger s within the same f am‐
ily, and 20 mergers across dif ferent families). The results obta ined indicate that both
liquidations and mer gers are more likely among smaller funds that s uffer net money
outflows in the pre vious year to the event. At the family level, me rgers are more fre‐
quent in outper forming families with a larger number of fu nds, whereas liquidations
occur in families wit h a lower number of funds. When comparing m ergers within the
same family with m ergers across different famil ies, we observe that the former s hare
more drivers with liq uidations than the lat ter. In addition, we obser ve that religious
and environmental f unds are more likely to suf fer exit events tha n other SR fund
types. Final ly, other interesting find ings point out that mer gers financially b enefit
investors in merged SR m utual funds and the f inancial outcomes of a cquiring fund
investors are not jeopa rdized.
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ALDA et AL.
fund industry could display different behavioural patterns (Benson
& Humphrey, 2008; B ollen, 2007; Renne boog, Ter Horst, & Zh ang,
2011), being less sensit ive to financial mat ters than conve ntional
fund flows. Thi s could have an impac t on the drivers a nd conse‐
quences of exit de cisions for this t ype of funds, wh ich makes it in‐
teresting to ana lyse liquidations and merger s in the specific case of
the SR mutual fu nd industry. Hence, i n this paper, we want to answer
two main research questions:
1. What are the det erminants of SR m utual fund exit s?
2. What are the eff ects of these exits?
The research qu estions answered in t his article allow us to sh ed light
on this unexplored top ic in the SR fund liter ature. Our r esults indi‐
cate that both liq uidations and me rgers are more like ly for smaller
funds that suf fer net money outflows in th e year prior to the event.
The financial f und perfor mance inversely af fects exit decisions, al‐
though it is only a si gnificant exit determinant i n some of the mod‐
els employed, ref lecting a lower impact on e xit decisions than other
variables, su ch as fund flows and fund size.
On the contra ry, liquidate d funds belong to fam ilies manag ing
a lower number of fun ds; however, mergers occ ur more frequen tly
in outperfo rming families that are in charge of a g reater number of
funds, espec ially in the case o f mergers withi n the same famil y. In
addition, exi t events are more frequ ent among religious an d environ‐
mental funds t han other SR fund typ es. Furthermore , exit events are
not significantly related to crisis periods.
When comparing the financial performance of merged and
acquiring funds before a merger, we observe that within‐family
merged funds present worse financial results than acquiring funds
for the last thre e years. In contr ast, across‐fam ily merged fun ds
do not perfor m differentl y from acquiring f unds. In the ca se of
money flows, wit hin‐family merge d funds suffe r net money out‐
flows before the eve nt, whereas acquiring fun ds show net money
inflows. In addit ion, across‐family mergers show t hat merged and
acquiring funds do not present significant differences in the year
prior to the event .
With regard to th e consequences for investor s, those of merged
funds obtain f inancial benef its from the se events, since a cquiring
funds achieve bet ter financia l performa nce after mergi ng with re‐
gard to the per formance of merge d funds before t he event. This
positive diffe rence increas es as more time pass es following the
merger for both wi thin‐family and across‐fami ly mergers. In general ,
investors in acqu iring funds are not prejudice d by mergers, because
their financi al performa nce is not signific antly different before and
after merger s; in fact, acq uiring funds im prove their per formance
two years afte r a merger.
With regard to me rgers’ consequence s for fund families, m ergers
within the sam e family allow mutual fun d families to eliminate thos e
funds that are los ing money, given that acquirin g funds obtain bette r
money flows afte r the event than merged fun ds before the event. In
addition, acq uiring funds sh ow positive net mon ey flows from the
second year follo wing the merger. We clarif y that these ar e some
of our main findin gs, which are mor e deeply develo ped in the next
sections.
Our resear ch contributes to the literature i n several ways. F irst,
this is the firs t paper, to the best of our know ledge, to investigate t he
exit decisions in t he SR mutual fund ind ustry. This is impor tant for in‐
vestors, mutu al fund managers, and reg ulators considering the l arge
growth exper ienced by the SR fund ind ustry in recent yea rs. Second,
we contribute to th e debate about whethe r SR and conventional mu‐
tual funds are sim ilar. Specifically, we tr y to elucidate wheth er SR and
conventional fun d exit decisions sh are determina nts and whethe r
the consequen ces of such decision s differ bet ween the two ty pes
of funds. Third , we establish co ntrols to detect d ifferences a mong
SR funds according to their ethical strategic focus. Specifically, we
try to determine whether the exit likelihood is higher for SR funds
implementin g multiple scree ns (ESG funds) or fo r SR funds with a
focused ethical strategy (green funds and religious funds). The exit
frequency of S R funds with different eth ical styles could provi de us
with an overvie w of the trends in the SR fun d industry from a sup ply
point of view.
The rest of the pa per is struc tured as follows: in S ection 2, we
provide the liter ature review; Section 3 repo rts the data and meth‐
ods implemente d; Section 4 sho ws the empiric al evidence of the
SR fund exit dete rminants; Se ction 5 shows the S R fund exit con‐
sequences; an d, finally, Secti on 6 ends the pape r with the main
conclusions.
2 | LITERATUREREVIEW
2.1 | Literatur ereviewofmutualfundexits
The mutual fun d industry h as experience d huge growth in th e last
decades, which has motivated numerous studies to examine differ‐
ent aspects of t he industry. However, at the same time, a c onsider‐
able number of fu nds have disappeared. Mut ual fund exits may take
different for ms: liquidation , a merger with an other port folio within
the same fund f amily, or a merger with a p ortfolio of a nother fund
family. Jayaraman e t al. (2002) expl ained that merge rs could con‐
stitute a mecha nism to correct t he possible exces s supply cause d
by the import ant growth of the m utual fund ind ustry. However, in
addition to mer gers, a fund fam ily has the option of l iquidation to
terminate a portfolio.
Regarding liqui dations, prior studies have poi nted out that fund
liquidations depend on fund returns, risk, assets under management,
and managerial i ncentives (see Ackerman n, McEnally, & Ravenscraft ,
1999; Brown, Goetz mann, & Park, 2001). More over, we should con‐
sider th at liquidations are decisions made by fund families . On this
line, Kolokolova (2011) stu died a sample of he dge funds and sug‐
gested that, wh ile independent funds may liq uidate funds based on
their result s, liquidations at the famil y level may be based on strate‐
gic behaviours t o attract resource s, eliminate funds with lowe r man‐
agement fees, o r promote cert ain funds to incre ase family prof its.
Lai (2016) also conclu ded that families trans fer performance and r e‐
sources across t heir funds to improve the perfo rmance of the most
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