Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows --- Hartzmark & Sussman, 2019 Flashcards
What is the explanation for why both institutional and non-institutional investors invested more money in stocks with high ESG ratings despite no evidence of superior returns?
A) Investors assumed high ESG ratings signaled better future performance, leading them to allocate more capital.
B) Institutional investors responded to regulatory and social pressures, while non-institutional investors were influenced by personal values and perceptions of sustainability.
C) Investors sought diversification by including high-ESG stocks, believing they would reduce risk in their portfolios.
D) Both types of investors were reacting to short-term trends and media coverage rather than long-term fundamentals.
B
What were the financial implications for mutual funds categorized as low sustainability compared to high sustainability funds?
A) Low sustainability funds faced substantial outflows, while high sustainability funds experienced significant inflows.
B) No significant financial impact was found for either category.
C) Both low and high sustainability funds gained inflows, but the middle-rated funds suffered outflows.
D) Low sustainability funds saw outflows only from institutional investors.
A
How did the investor response to the extreme globe categories (one or five globes) compare to the response to the intermediate globe categories (two, three, or four globes)?
A) The response to extreme categories was muted compared to intermediate categories.
B) Investors showed a preference for intermediate globe categories.
C) Extreme globe categories received pronounced responses, highlighting investor focus on discrete, rather than continuous measures.
D) The extreme globe categories saw moderate responses, indicating investor skepticism.
C
Why was Morningstar’s sustainability rating considered a “quasi-exogenous shock”?
A) It was anticipated by investors, allowing them to adjust in advance.
B) It did not change fund fundamentals but made ESG scores more visible.
C) It caused a fundamental shift in financial regulations.
D) It was only relevant to institutional investors.
B
What was a major driver of investors’ focus on Morningstar’s sustainability rating?
A) Investors preferred sustainability scores over star ratings.
B) Investors focused more on easy-to-understand globe categories rather than raw sustainability scores.
C) Investors carefully analyzed percentile ranks before making investment decisions.
D) Investors ignored sustainability ratings altogether.
B
What effect did high sustainability ratings have on fund flows?
A) High-rated funds experienced net inflows of over $24 billion.
B) High-rated funds saw minimal changes in fund flows.
C) High-rated funds underperformed and experienced outflows.
D) High-rated funds performed better financially but had no significant fund flow change.
A
What did Hartzmark and Sussman (2019) find regarding the correlation between sustainability ratings and future returns?
A) High ESG ratings strongly predicted higher returns.
B) No evidence supported a link between high ESG ratings and future outperformance.
C) ESG ratings were negatively correlated with future returns.
D) ESG ratings were only relevant for short-term investors.
B
What behavioral tendency did investors exhibit when responding to Morningstar’s sustainability ratings?
A) Preference for complex, detailed analysis.
B) Focus on discrete and extreme outcomes rather than continuous measures.
C) Avoidance of sustainability ratings altogether.
D) Preference for funds that fell in the middle categories.
B
What role do institutional investors play in driving ESG-focused fund flows?
A) They invest based purely on expected returns.
B) They face regulatory and social pressures to prioritize ESG-friendly investments.
C) They avoid ESG funds due to potential underperformance.
D) Their investment patterns are unrelated to ESG considerations.
B
How did investors react to the introduction of Morningstar’s ESG ratings?
A) No significant market reaction occurred.
B) Investors moved assets away from low-rated ESG funds while favoring high-rated ones.
C) Investors reacted equally to all ESG ratings.
D) Only institutional investors responded to the change.
B
What percentage of the NYSE market cap was affected by Morningstar’s rating change?
A) 10%
B) 25%
C) 40%
D) 70%
C
What psychological bias did investors exhibit in their reaction to sustainability ratings?
A) Confirmation bias
B) Overweighting extreme attributes (affect heuristic)
C) Loss aversion
D) Status quo bias
B
How did high-sustainability funds compare to low-sustainability funds in terms of perceived risk?
A) High-sustainability funds were viewed as riskier.
B) Low-sustainability funds were perceived as safer.
C) High-sustainability funds were perceived as less risky.
D) No difference in risk perception was found.
C
What was the main motivation behind investors favoring high-ESG-rated funds?
A) Purely financial incentives
B) Nonmonetary motivations like social norms and altruism
C) Higher expected short-term returns
D) Government subsidies for ESG investments
B
How did fund flows respond to funds rated two, three, or four globes?
A) These funds saw the most investment activity.
B) These funds saw negligible changes in fund flows.
C) These funds experienced the largest net outflows.
D) Investors showed a strong preference for mid-range ratings.
B
