Impact of environmental policy announcements on investment performance of equity mutual funds

Abstract

Previous research has shown that stock prices will also respond to environmental policy announcements because of the impact on firms' value. As equity mutual funds are primarily invested in stocks, this study aims to examine whether these announcements also impact the investment performance of equity mutual firms. Some studies also prove that it is still debatable whether green mutual funds or polluting mutual funds perform better in terms of investment returns. Based on this, this study will also further extend to analyze investment performance between green and polluting equity mutual funds under stringent and loosened environmental policy announcements. This study utilized the polluting and green mutual funds data from Morningstar as well as US SIF website. For the announcements, the major environmental policy announcements were selected from several US government websites as well as news sources. The event study methodology along with regression analysis was used in this study to capture the cumulative abnormal returns (CAR) generated from green and polluting mutual funds under stringent and loosened environmental policy announcements. The findings indicate that significant impacts were observed on cumulative abnormal returns (CAR) in both stringent and loosened announcements for event periods of 5 days, 10 days and 20 days. To account for fund and fund managers’ characteristics, control variables were added, and expense ratio and fund size have material effect on fund returns except portfolio turnover ratio which appears to have weak influence on mutual funds’ returns under the announcements. Furthermore, when comparing investment performance of green and polluting mutual funds’ performance under stringent and loosened environmental policy announcements, it was found that green mutual funds outperform most of the time.