Climatic Disasters, Mutual Fund Trading and Asset Pricing

Feiwei Chen

doi:10.7273/000005038

This dissertation consists of two essays that investigate the impact of mutual fund managers’ personal natural disaster experiences on their beliefs and trading behaviors, and the subsequent asset prices. My first essay investigates the impact of natural disaster shocks on mutual fund managers' risk-taking behaviors. Our hand-collected home address data of U.S. equity mutual fund managers enable us to precisely capture the natural disasters experienced by those managers. Using a difference-in-differences approach, we find that following abnormal natural disaster shocks, shocked managers significantly decrease their holdings in disaster-zone stocks and stocks with high expected disaster risk as compared to non-shocked managers. Shocked managers also significantly reduce the total portfolio risk and improve the environmental performance of their delegated portfolios in subsequent quarters. The reduction in fund risk is more consistent with a career concern motivation and is unlikely driven by clientele effects. Overall, our results indicate that natural disaster shocks can alter the risk attitude of professional fund managers, and these managers in turn project their altered preferences to their delegated portfolios.In the second essay, we study how mutual fund managers' personal experiences of climatic disasters affect their beliefs about climate risk and their trading behaviors, which impose a substantial impact on asset prices. Combining the detailed home addresses of mutual fund managers with county-level climatic disasters, we show that following exposure to climatic disasters, professional money managers significantly decrease (increase) holdings of firms with low (high) environmental profiles, especially in non-disaster zones. Unaffected by disaster shocks, these firms exhibit no changes in firm fundamentals. Yet collected trading by exposed managers imposes significant price pressure on these firms, causing prolonged mispricing in the following six months of as much as 4.20% in terms of CAARs and a reversal in the subsequent one-and-half years. We directly link exposed managers' trading to this mispricing effect and rule out the impact from fund investor flows or retail investor trading. Therefore, we demonstrate that fund managers' disaster experiences and trading behaviors can impose non-fundamental risks on firms based on their environmental profiles. Such trading behaviors also amplify natural disaster shocks to non-disaster zones via money managers' reactions to climate disaster risk.

Climatic Disasters, Mutual Fund Trading and Asset Pricing

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