Safety accidents and mutual fund flows

Abstract

Using a hand-collected dataset on major safety accidents (MSAs) in China, we find risky equity funds experience negative net flows following MSAs. Furthermore, riskier funds demonstrate higher sensitivities to casualties than safer funds do. Consistent with the idea that more serious accidents attract greater public attention, “extraordinarily serious” accidents’ impact on flows is larger than “serious” accidents’. Investors’ willingness to take risks decreases and insurance demand increases following MSAs. Flows are not explained by funds’ exposure to MSAs’ economic losses. Collectively, we interpret the negative effect of MSAs on subsequent fund flows as evidence of increased risk aversion stemming from negative emotions associated with MSAs.