IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON THE LIQUIDITY OF MUTUAL FUNDS: THE MODERATING ROLE OF CORPORATE GOVERNANCE
Main Article Content
Abstract
Mutual funds provide an opportunity to invest in a diversified portfolio. The mutual fund industry is growing at a rapid speed. The prime function of mutual funds is to provide liquidity to the investor. Investors prefer mutual funds with high liquidity, mutual fund managers are genuinely concerned regarding the mutual fund's liquidity. In recent times the concept of corporate social responsibility (CSR) is getting popularity. The study aimed to determine the impact of CSR (Corporate Social Responsibility) on the liquidity considering the role of corporate governance on the mutual funds operating in Pakistan. This is the first attempt to understand the impact of CSR on the liquidity of mutual funds. The study investigated the impact of CSR on liquidity during the period (2011-2021). The sample of the study consists of both Islamic and conventional mutual funds. For this purpose, the CSR and CG index was developed, and the annual financial reports were examined. The study used the generalized method of moments (GMM). The GMM model controlled the endogeneity problem caused by firm-specific variables and liquidity. The result shows that the fund engaged in a prominent level of CSR activities provides more liquidity. The corporate governance not only significantly impact the liquidity but it also moderate the relationship between CSR engagement and liquidity. This effect is more pronounced in conventional mutual funds. The study's finding dictates that incorporating CSR activities will lead mutual funds toward more liquidity.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
References
Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics. https://doi.org/10.1016/j.jfineco.2004.06.007
AFZA, T., & RAUF, A. L. I. (2009). Performance Evaluation of Pakistani Mutual Funds. Pakistan Economic and Social Review.
Ali, S. (2016). Corporate governance and stock liquidity in Australia: A pitch. Journal of Accounting and Management Information Systems, 15(3), 624–631.
Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects. Journal of Financial Markets, 5(1), 31–56. https://doi.org/10.1016/S1386-4181(01)00024-6
Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics. https://doi.org/10.1016/0304-405X(86)90065-6
Arif, M., Samim, M. M., Khurshid, M. K., & Ali, A. (2019). Islamic Versus Conventional Mutual Funds Performance in Pakistan; Comparative Analysis through Performance Measures and DEA Approach. European Online Journal of Natural and Social Sciences.
Awaysheh, A., Heron, R. A., Perry, T., & Wilson, J. I. (2020). On the relation between corporate social responsibility and financial performance. Strategic Management Journal. https://doi.org/10.1002/smj.3122
Bagattini, G., Fecht, F., & Maddaloni, A. (2020). Liquidity Support and Distress Resilience in Bank-Affiliated Mutual Funds. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3710511
Barauskaite, G., & Streimikiene, D. (2021). Corporate social responsibility and financial performance of companies: The puzzle of concepts, definitions and assessment methods. Corporate Social Responsibility and Environmental Management. https://doi.org/10.1002/csr.2048
Bauer, R., Otten, R., & Rad, A. T. (2006a). Ethical investing in Australia: Is there a financial penalty? Pacific Basin Finance Journal. https://doi.org/10.1016/j.pacfin.2004.12.004
Bauer, R., Otten, R., & Rad, A. T. (2006b). New Zealand mutual funds: measuring performance and persistence in performance. Accounting & Finance, 46(3), 347–363.
Benlemlih, M. (2014). Why do socially responsible firms pay more dividends. Second Geneva Summit on Sustainable Finance.
Borgers, A., Derwall, J., Koedijk, K., & ter Horst, J. (2015). Do social factors influence investment behavior and performance? Evidence from mutual fund holdings. Journal of Banking and Finance. https://doi.org/10.1016/j.jbankfin.2015.07.001
Brennan, M. J., & Subrahmanyam, A. (1996). Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics. https://doi.org/10.1016/0304-405X(95)00870-K
Campbell, D., Craven, B., & Shrives, P. (2003). Voluntary social reporting in three FTSE sectors: A comment on perception and legitimacy. In Accounting, Auditing & Accountability Journal. https://doi.org/10.1108/09513570310492308
Cao, C., Chen, Y., Liang, B., & Lo, A. W. (2011). Can Hedge Funds Time Market Liquidity? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1537925
Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82.
Chang, X. (Simba), Tan, W., Yang, E., & Zhang, W. (2018). Stock Liquidity and Corporate Social Responsibility. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3130572
Chen, J. (2005). Pervasive liquidity risk and asset pricing. Job Market Paper, 15.
Chernenko, S., & Doan, V.-D. (2022). Mutual Fund Liquidity Creation. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4019567
Chhabra, M., Ferris, S. P., & Sen, N. (2009). Investor protection effects on corporate liquidity and the cost of capital. Applied Economics Letters, 16(8), 819–826.
Chordia, T., Roll, R., & Subrahmanyam, A. (2000). Commonality in liquidity. Journal of Financial Economics. https://doi.org/10.1016/S0304-405X(99)00057-4
Chordia, T., Roll, R., & Subrahmanyam, A. (2001). Market liquidity and trading activity. The Journal of Finance, 56(2), 501–530.
Clare, A., O’Sullivan, N., Sherman, M., & Zhu, S. (2019). The performance of US bond mutual funds. International Review of Financial Analysis. https://doi.org/10.1016/j.irfa.2018.12.001
Datar, V. T., Y. Naik, N., & Radcliffe, R. (1998). Liquidity and stock returns: An alternative test. Journal of Financial Markets. https://doi.org/10.1016/S1386-4181(97)00004-9
Deb, S. S. (2011). Liquidity Risk in Mutual Fund Portfolios 1 Liquidity Risk in Mutual Fund Portfolios.
El Ghoul, S., & Karoui, A. (2017a). Does corporate social responsibility affect mutual fund performance and flows? Journal of Banking and Finance, 77(December), 53–63. https://doi.org/10.1016/j.jbankfin.2016.10.009
El Ghoul, S., & Karoui, A. (2017b). Does corporate social responsibility affect mutual fund performance and flows? Journal of Banking and Finance, 77, 53–63. https://doi.org/10.1016/j.jbankfin.2016.10.009
Farache, F., & Perks, K. J. (2010). CSR advertisements: A legitimacy tool? Corporate Communications. https://doi.org/10.1108/13563281011068104
Ferreira, M. A., Keswani, A., Miguel, A. F., & Ramos, S. B. (2013). The Determinants of mutual fund performance: A cross-country study. Review of Finance, 17(2), 483–525. https://doi.org/10.1093/rof/rfs013
Foo, Y.-B., & Zain, M. M. (2010). Board independence, board diligence and liquidity in Malaysia: A research note. Journal of Contemporary Accounting & Economics, 6(2), 92–100.
Foo, Y. B., & Zain, M. M. (2010). Board independence, board diligence and liquidity in Malaysia: A research note. Journal of Contemporary Accounting and Economics. https://doi.org/10.1016/j.jcae.2010.10.001
Foran, J., Hutchinson, M. C., & O’Sullivan, N. (2014). The asset pricing effects of UK market liquidity shocks: Evidence from tick data. International Review of Financial Analysis, 32, 85–94.
García-Melón, M., Pérez-Gladish, B., Gómez-Navarro, T., & Mendez-Rodriguez, P. (2016). Assessing mutual funds’ corporate social responsibility: a multistakeholder-AHP based methodology. Annals of Operations Research, 244(2), 475–503. https://doi.org/10.1007/s10479-016-2132-5
Hasbrouck, J. (2009). Trading costs and returns for US equities: Estimating effective costs from daily data. The Journal of Finance, 64(3), 1445–1477.
Hasbrouck, J., & Saar, G. (2009). Technology and liquidity provision: The blurring of traditional definitions. Journal of Financial Markets, 12(2), 143–172.
Hasbrouck, J., & Seppi, D. J. (2001). Common factors in prices, order flows, and liquidity. Journal of Financial Economics, 59(3), 383–411.
Hiraki, T., Liu, M., & Wang, X. (2015). Country and industry concentration and the performance of international mutual funds. Journal of Banking & Finance, 59, 297–310.
Homayoun, S., & Homayoun, S. (2015). Internet-based compulsory information disclosure by listed companies in Tehran stock exchange. International Business Management. https://doi.org/10.3923/ibm.2015.791.797
Hwang, S., & Lu, C. (2007). Cross-sectional stock returns in the UK market: the role of liquidity risk. In Forecasting Expected Returns in the Financial Markets (pp. 191–213). Elsevier.
Idzorek, T. M., Xiong, J. X., & Ibbotson, R. G. (2012). The liquidity style of mutual funds. Financial Analysts Journal, 68(6), 38–53.
Jang, S. (2014). The Relation between Corporate Social Responsibility Statement of Candidate. October, 1–117.
Javaid, F., & Saboor, A. (2015). Impact of Corporate Governance index on Firm Performance: evidence from Pakistani manufacturing sector. Journal of Public Administration and Governance, 5(2), 1–21.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics. https://doi.org/10.1016/0304-405X(76)90026-X
Jiraporn, P., Chatjuthamard, P., Tong, S., & Kim, Y. S. (2015). Does corporate governance influence corporate risk-taking? Evidence from the Institutional Shareholders Services (ISS). Finance Research Letters, 13, 105–112.
Jitaree, W. (2015). Corporate social responsibility disclosure and financial performance : evidence from Thailand. Institutional Repository for the University of Wollongong, 1–402. http://ro.uow.edu.au/theses/ 4413
Johnson, S. A., Lin, J.-C., & Song, K. R. (2006). Dividend policy, signaling, and discounts on closed-end funds. Journal of Financial Economics, 81(3), 539–562.
Koh, K., Li, H., & Tong, Y. H. (2023). Corporate social responsibility (CSR) performance and stakeholder engagement: Evidence from the quantity and quality of CSR disclosures. Corporate Social Responsibility and Environmental Management. https://doi.org/10.1002/csr.2370
Kong, D., Ji, M., & Zhang, F. (2022). Individual investors’ dividend tax reform and corporate social responsibility. Journal of International Financial Markets, Institutions and Money. https://doi.org/10.1016/j.intfin.2022.101542
Korajczyk, R. A., & Sadka, R. (2008). Pricing the commonality across alternative measures of liquidity. Journal of Financial Economics, 87(1), 45–72.
Kryzanowski, L., & Mohebshahedin, M. (2016). Board governance, Monetary interest, And closed-end fund performance. Journal of Corporate Finance, 38, 196–217. https://doi.org/10.1016/j.jcorpfin.2016.01.010
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58(1–2), 3–27.
Lin, H., Wang, J., & Wu, C. (2011). Liquidity risk and expected corporate bond returns. Journal of Financial Economics, 99(3), 628–650. https://doi.org/10.1016/j.jfineco.2010.10.004
Lou, X., & Sadka, R. (2011). Liquidity level or liquidity risk? Evidence from the financial crisis. Financial Analysts Journal. https://doi.org/10.2469/faj.v67.n3.5
Ma, Y., Xiao, K., & Zeng, Y. (2020). Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity. SSRN Electronic Journal, November. https://doi.org/10.2139/ssrn.3640861
Majeed, S., Aziz, T., & Saleem, S. (2015). The Effect of Corporate Governance Elements on Corporate Social Responsibility (CSR) Disclosure: An Empirical Evidence from Listed Companies at KSE Pakistan. International Journal of Financial Studies, 3(4), 530–556. https://doi.org/10.3390/ijfs3040530
Makni, R., Benouda, O., & Delhoumi, E. (2016). International evidence on Islamic equity fund characteristics and performance persistence. Review of Financial Economics, 31, 75–82.
Mallouh, A. A., & Tahtamouni, A. (2018). The impact of social responsibility disclosure on the liquidity of the Jordanian industrial corporations. International Journal of Managerial and Financial Accounting, 10(3), 273–300. https://doi.org/10.1504/IJMFA.2018.093504
Maqbool, Z., Abid, A., & Bhutta, A. I. (2022). Effect of corporate social responsibility performance on dividend pay-out: Role of corporate governance quality. Frontiers in Psychology. https://doi.org/10.3389/fpsyg.2022.883952
Morey, M. R. (2002). Mutual Fund Age and Morningstar Ratings. Financial Analysts Journal. https://doi.org/10.2469/faj.v58.n2.2523
Naidenova, I., Parshakov, P., Zavertiaeva, M., & Tomé, E. (2015). Look for people, not for alpha: mutual funds success and managers intellectual capital. Measuring Business Excellence, 19(4), 57–71. https://doi.org/10.1108/MBE-11-2014-0039
Naveed, F., Khawaja, I., & Maroof, L. (2020). Are Islamic mutual funds exposed to lower risk compared to their conventional counterparts?: Empirical evidence from Pakistan. ISRA International Journal of Islamic Finance, 12(1), 69–87. https://doi.org/10.1108/IJIF-01-2019-0012
Nikolaeva, R., & Bicho, M. (2011). The role of institutional and reputational factors in the voluntary adoption of corporate social responsibility reporting standards. Journal of the Academy of Marketing Science. https://doi.org/10.1007/s11747-010-0214-5
Pástor, Ľ., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642–685.
Performance, C. S. (2016). WIF-16-004 ： Aug 2016 Corporate Social Performance and Market Liquidity Risk : The Case of the Japanese Banking Sector Corporate Social Performance and Market Liquidity Risk :
Philpot, J., & Peterson, C. A. (2006). Manager characteristics and real estate mutual fund returns, risk and fees. Managerial Finance, 32(12), 988–996. https://doi.org/10.1108/03074350610710481
Post, J. E., Preston, L. E., & Sachs, S. (2002). Managing the extended enterprise: The new stakeholder view. California Management Review, 45(1), 6–28.
Rao, Z.-R., Tauni, M. Z., & Iqbal, A. (2015). Comparison between Islamic and General Equity Funds of Pakistan: Difference in Their Performances and Fund Flow Volatility. Emerging Economy Studies. https://doi.org/10.1177/2394901515599273
Reichenbacher, M., Schuster, P., & Uhrig‐Homburg, M. (2020). Expected Bond Liquidity. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3642604
Reverte, C. (2009). Determinants of corporate social responsibility disclosure ratings by Spanish listed firms. Journal of Business Ethics, 88(2), 351–366. https://doi.org/10.1007/s10551-008-9968-9
Sadka, R. (2006). Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk. Journal of Financial Economics, 80(2), 309–349.
Samaha, K., Dahawy, K., Hussainey, K., & Stapleton, P. (2012). The extent of corporate governance disclosure and its determinants in a developing market: The case of Egypt. Advances in Accounting, 28(1), 168–178.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783.
Subramaniam, R. K., Samuel, S. D., & Mahenthiran, S. (2016). Liquidity implications of corporate social responsibility disclosures: Malaysian evidence. Journal of International Accounting Research, 15(1), 133–153.
Suchman, M. C. (1995). Managing Legitimacy: Strategic and Institutional Approaches. Academy of Management Review. https://doi.org/10.5465/amr.1995.9508080331
Urniežius, T. (2012). Liquidity risk and performance of Lithuanian mutual funds. April.
Uyar, A., Abdelqader, M., & Kuzey, C. (2023). Liquidity and CSR: a chicken and egg story. Society and Business Review. https://doi.org/10.1108/SBR-01-2022-0032
van der Laan, S. (2009). The role of theory in explaining motivation for Corporate Social Disclosures: Voluntary disclosures vs ‘ solicited ’ disclosures. Australlasian Business and Finance Journal.
Vidal, J. (2012). Do Liquidity and Idiosyncratic Risk Matter?: Evidence from the European Mutual Fund Market. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1997446
Wahal, S., & Wang, A. Y. (2011). Competition among mutual funds. Journal of Financial Economics, 99(1), 40–59.
Watanabe, A., & Watanabe, M. (2008). Time-varying liquidity risk and the cross section of stock returns. The Review of Financial Studies, 21(6), 2449–2486.
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581–606.
Yang, M., Bento, P., & Akbar, A. (2019). Does CSR influence firm performance indicators? Evidence from Chinese pharmaceutical enterprises. Sustainability, 11(20), 5656.
Zheng, C., Cheung, A. (Wai K., Zhang, J., & Haider, I. (2023). Corporate social responsibility and bank liquidity creation. Journal of Financial Research. https://doi.org/10.1111/jfir.12322