Investor behavior and the demand for conventional and socially responsible mutual funds

Abstract

This study analyzes the demand for conventional and socially responsible (SR) mutual funds using cash flow data from a large sample of U.S. equity funds. For both types of funds, previous results have a positive impact on inflows. However, redemptions' behavior differs. Outflows correlate negatively with past results in conventional portfolios, whereas this relationship is positive for SR funds: investors are more likely to redeem shares in the best-performing funds while holding funds that performed poorly. This behavior is compatible with a disposition effect in SR funds. These results hold even after controlling for other variables driving mutual fund demand. Hence, inflows and outflows of conventional funds were found to be positively related to past idiosyncratic risk, expenses and turnover, but negatively related to size and age. For SR funds, these relationships are stronger for size and idiosyncratic risk, and take the opposite sign for age, expenses and turnover.