The power of ethical words

Abstract

In this research, we analyse the impact of the inclusion of ethical expressions in the prospectuses of socially responsible (SR) mutual funds on money flows. We contribute to the existing literature by proposing a text-based measure that integrates three attributes that are relevant to whether clients are attracted: exclusiveness, intensity and lexical diversity. We analyse a sample formed of 266 SR US equity mutual funds in the period 1999–2019. Our findings show that both the proposed indicator and other alternative partial proxies based on textual data have a positive impact on the money flows of the SR funds. This effect is more relevant in the case of SR mutual funds belonging to smaller families. Besides, persistence in money flows is more intense for SR mutual funds that are more attractive because of their ethical expressions. Another finding shows that return-chaser behaviour occurs among all SR investors, independently of the level of text attractiveness of the mutual funds in which they invest, revealing that they take into account both financial and non-financial outcomes. Our results indicate that policymakers should control fund prospectus information, given its importance for investors' decisions. In addition, managers should be especially cautious with the information provided in prospectuses because of its impact on investor decisions.