Does Green Fund Ownership Impact Liquidity and Analyst Following?

I examine whether a stock’s inclusion in green exchange traded funds and mutualfunds (GMFs) affects liquidity and analyst following. I base these predictions on prior literature that establishes that a firm’s pro-ESG (Environmental, Social, and Governance) orientation can spur investors’ interest and mitigate investors’ agency concerns (by signaling that managers are pro-social). I test these predictions using difference-indifferences models of monthly turnover, bid-ask spread, and analyst coverage to examine whether firm liquidity, trading costs, and analyst following improve post-GMF inclusion. I find support for all three predictions, even though GMF ownership in my sample is exceedingly modest. Importantly, I identify my treatment effects as incremental to the liquidity boost firms receive when added to conventional mutual funds and exchange traded funds (ETFs). Together, these results suggest that GMF inclusion is perceived as an informative signal of a firm’s green credentials, which leads to more trading volume, lower trading costs, and more analyst participation.