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Valuation Risk in Mutual Fund Portfolio Disclosure
[Illiquidity and stock returns: Cross-section and time-series effects]

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  • Hsiu-Lang Chen

Abstract

Valuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare their performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament. (JEL G10, G23)

Suggested Citation

  • Hsiu-Lang Chen, 2022. "Valuation Risk in Mutual Fund Portfolio Disclosure [Illiquidity and stock returns: Cross-section and time-series effects]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(1), pages 243-288.
    • Handle: RePEc:oup:rasset:v:12:y:2022:i:1:p:243-288.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raab021
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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