Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds

58 Pages Posted: 8 Jul 2021 Last revised: 4 Apr 2022

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Yi Li

Board of Governors of the Federal Reserve System

Xintong Zhan

Department of Finance, School of Management, Fudan University

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK)

Linyu Zhou

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: July 6, 2021

Abstract

This paper provides a detailed investigation on how firms’ carbon emission levels affect trading behaviors of mutual funds and liquidity conditions of corporate bonds. Our analysis is conducted with a full sample from 2007 to 2019 and causality is further established by exploiting the Paris Agreement. We find that mutual funds are more likely to sell corporate bonds in herds if the bonds’ issuing firms have higher carbon emissions, driven by funds’ concerns for carbon-related redemption risks and regulatory risks, rather than by a permanent change in investing ethics or preferences. We show that higher carbon exposures in mutual fund portfolios lead to more investor outflows, and bonds tend to experience more sell herding if their holding mutual funds have higher flow-to-carbon sensitivity. We also find that bonds issued by high-carbon firms experience worse liquidity conditions.

Keywords: Carbon emissions, corporate bonds, mutual funds, herding, redemption risks, liquidity

JEL Classification: G11, G20, G23, G41

Suggested Citation

Cao, Jie and Li, Yi and Zhan, Xintong and Zhang, Weiming Elaine and Zhou, Linyu, Carbon Emissions, Mutual Fund Trading, and the Liquidity of Corporate Bonds (July 6, 2021). Available at SSRN: https://ssrn.com/abstract=3881497 or http://dx.doi.org/10.2139/ssrn.3881497

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://sites.google.com/site/jiejaycao

Yi Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

HOME PAGE: http://sites.google.com/view/yili/

Xintong Zhan

Department of Finance, School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

HOME PAGE: http://sites.google.com/view/xintongzhan

Weiming Elaine Zhang

The Chinese University of Hong Kong (CUHK) ( email )

Cheng Yu Tung Building
Shatin
Hong Kong

HOME PAGE: http://sites.google.com/site/weimingzhangelaine/

Linyu Zhou

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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