Center for Advancing Accounting

Does Green Fund Ownership Impact Liquidity and Analyst Following?

• In Event: Sustainability and Investment Decisions

Abstract

I examine whether inclusion in green exchange-traded funds and mutual funds (collectively referred to hereafter as 'GMFs') affects firm liquidity and analyst following. I expect GMF inclusion to reduce information asymmetry and signal that managers are less likely to exploit information asymmetries in trading with outside investors. I test these predictions using diff-in-diff models of monthly turnover, bid-ask spread, and analyst coverage to examine whether firm liquidity, trading costs, and analyst following improve post-GMF inclusion. Although GMF inclusion is exceedingly modest, monthly turnover significantly increases. This is over-and-above the trading boost firms receive when added to conventional mutual funds and ETFs. Monthly bid-ask spreads shrink after GMF inclusion, even when controlling for the increased volume and the effects of general mutual fund inclusion. Analyst following significantly increases post-inclusion. Together, these results show that GMF inclusion is an informative signal that leads to more trading volume, lower trading costs, and more analyst participation.

Author

• Nicole Holden, Arizona State University