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| Mutual Fund Investors and Corporate Governance: New Insights from Investors' Social and Sustainability Preferences |
| LAI Mianshan, ZHOU You, Philip Arestis
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| China Center for Special Economic Zone Research, Shenzhen University;Accounting and Finance Department, Leeds University Business School;Department of Land Economy, University of Cambridge |
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Abstract Environmental, Social, and Governance (ESG) investment is increasingly favored in China's public mutual fund industry. Prior to 2008, this field was still in a nascent or even blank state, but by the end of 2023, China's green loan balance had reached as high as 30.08 trillion RMB, marking significant progress in China's financial market in the area of sustainable investment. This growth aligns with national priorities like the carbon peaking and carbon neutrality goals and sustainable development, yet it faces challenges such as inconsistent information disclosure, non-uniform standards, and greenwashing risks. Currently, academic and practical interest have surged, with studies highlighting ESG's role in enhancing fund performance, attracting inflows, and mitigating risks during market uncertainties (e.g., Lins et al., 2017; Hartzmark and Sussman, 2019). However, while overall ESG impacts are well-documented, the independent role of the governance (G) dimension remains underexplored, particularly in how it influences investor behavior. Good governance is foundational to corporate sustainability, which can boost firm value, performance, and improve long-term stability (Gompers et al., 2003; John et al., 2008). Investors, driven by social preferences and non-financial motives, may favor funds emphasizing governance to align with ethical norms, even at potential financial return trade-offs (Riedl and Smeets, 2017; Pastor et al., 2021). Drawing on a comprehensive dataset of MSCI ESG and China's mutual funds from 2007 to 2023, this paper addresses this gap by constructing a novel fund-level governance score, which is based on MSCI governance pillar scores weighted by fund holdings, and investigates its link to fund flows amid rising ESG adoption and investor sophistication. We have the following main results.
First, this paper reveals a significant “corporate governance premium” flow phenomenon in the China's fund market, and this phenomenon is more reasonably explained by investors' social preference theory. Specifically, investors are more inclined to allocate capital to funds within their portfolios that actively practice good governance principles. This indicates that, driven by social preferences and sustainable development concepts, Chinese fund investors incorporate the governance level of portfolio companies into their decision-making framework when selecting funds, thereby forming capital flow characteristics based on governance quality. Second, investors' positive responses to corporate governance exhibit significant asymmetric characteristics, primarily manifested in buying rather than selling. Further analysis shows governance-driven fund flows differ by fund size and star ratings. Smaller funds and highly rated funds experience more significant effects. Third, this paper further strengthens the reliability of these conclusions through various robustness tests, including instrumental variable (IV) analysis and propensity score matching (PSM).
This study contributes threefold to the literature. First, this paper extends the study of the information sets utilized by equity fund investors in their selection processes (Berk and Van Binsbergen, 2016; Barber et al., 2016). Second, it advances understanding of mutual fund dynamics by highlighting buy-sell asymmetries in governance sensitivity, which contributes to behavioral finance in decision contexts. Third, it illuminates non-financial motives of fund investors in China's market, where investors trade off returns for sustainability, which aligns with global evidence (Hartzmark and Sussman, 2019; Pastor et al., 2021).
In practice, our findings suggest fund managers may focus on governance transparency to get more societal preference-driven inflows, especially for smaller or higher-rated products. Regulators may tackle greenwashing by encouraging standardized ratings and ESG disclosure. The result will assist with the ESG market grow towards “dual carbon” goals.
In conclusion, this paper offers insights into fund investor behavior that are centered on governance. It illustrates how, in China's evolving ESG landscape, social and sustainability preferences impact the mutual fund market. It provides useful recommendations for enhancing fund designs and regulatory procedures by illustrating how governance drives asymmetric, heterogeneous flows, which support China's sustainable financial development.
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Received: 26 May 2025
Published: 27 February 2026
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