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

60 Pages Posted: 8 Jul 2021 Last revised: 27 Jul 2022

See all articles by Jie Cao

Jie Cao

The Hong Kong Polytechnic University - School of Accounting and Finance

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 (Lucy) Zhou

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

Date Written: July 6, 2021

Abstract

This paper investigates how firms' carbon emission levels affect the trading behavior of bond mutual funds. We find that mutual funds collectively sell corporate bonds issued by firms with high carbon emissions, driven by funds' concerns for carbon-related redemption risks and regulatory risks, rather than by a permanent shift in funds' investing preferences. Higher carbon exposures in mutual fund portfolios lead to more investor outflows, and bonds tend to experience more intensive selling if their holding mutual funds have higher flow-to-carbon sensitivity. Bonds issued by high carbon firms experience worse liquidity conditions, especially when concerns for carbon-related risks heighten.

Keywords: Carbon emissions, corporate bonds, mutual funds, collective selling, 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 Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong

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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