Essays on ESG Funds and Corporate Finance
Saliev, Shodi
2024
Abstract
This dissertation consists of three chapters. The first two chapters focus on ESG mutual funds, while the third chapter examines whistleblowers and fraud prevention in a corporate setting. In Chapter 1, I examine the connection between fund fees, ESG performance, and risk-adjusted financial returns for active equity ESG mutual funds. In recent years, the growth of Environmental, Social, and Governance (ESG) mutual funds has been substantial, with a significant increase in both the number of funds and the amount of committed capital. Despite extensive research on the financial performance of ESG investments, the relationship between fund fees and performance within the ESG space remains underexplored. Our analysis reveals a counterintuitive finding: higher fund fees are associated with worse ESG performance, as measured by various ESG ratings. However, I find no negative relationship between fund fees and financial performance; on the contrary, higher fees are weakly correlated with better financial outcomes. Additionally, funds with higher ESG ratings tend to have superior risk-adjusted realized returns. The findings emphasize the complexities involved in ESG fund management and the need for investors to carefully evaluate ESG performance, financial returns and fee structures. In Chapter 2, I examine the transition of traditional active mutual funds to sustainable or ESG-oriented funds. Using propensity matching and dynamic difference-in-difference methods, I find that converted funds indeed rebalance their portfolio towards firms with better ESG performance. Additionally I demonstrate that ESG fund conversions increase fund flows after about one and a half years after the treatment which might indicate the attractiveness of these funds to a growing base of environmentally and socially conscious investors. In the subsample analysis, I demonstrate that increase in ESG ratings is primarily driven by low-cost funds which is in line with findings in Chapter 1. As for the fund flows, I find that there is a substantial heterogeneity between funds with high and low assets under management (AUM): high AUM non-ESG funds indeed have higher fund flows relative to the control group after conversion, while I do not observe significant effects for low-AUM funds. These findings contribute to the ongoing debate on the efficacy of ESG investing and provide insights for investors considering the transition to sustainability-focused strategies. In Chapter 3, I examine how whistleblower compensation affects fraud disclosure and deterrence. My three-layered model has the firm with the CEO, the manager and the employee. The manager can steal from the firm, and the CEO, if informed, can expose him. Because of reputation concerns, she does not always disclose fraud, in which case the employee can blow the whistle. I show that, as the whistleblower reward increases, he is willing to disclose more fraud. This motivates the CEO to invest more in learning about fraud, however, the range of the CEO disclosed payoffs declines due to reputation costs. Because of that, the effect on ex-ante probability of fraud is ambiguous: depending on the distribution of cash flows, committed fraud might either increase or decline.Deep Blue DOI
Subjects
Mutual funds ESG Sustainable investing Whistleblowers
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