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Window dressing in mutual funds

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  • Agarwal, Vikas
  • Gay, Gerald D.
  • Ling, Leng
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    Abstract

    This paper introduces two measures to investigate potential window-dressing behavior among mutual fund managers. We show that unskilled managers that perform poorly are more likely to window dress by strategically purchasing winner stocks and selling loser stocks near quarter ends. Further, funds with higher expense ratios and greater portfolio turnover are associated with more window dressing. We also find that funds involved in window dressing perform poorly in the following quarter. Given these adverse effects, we demonstrate how window dressing can exist in equilibrium. Current reporting requirements allow managers up to 60 days' delay to report end of quarter portfolio holdings. We show how window-dressing managers can benefit from incrementally higher fund flows if good performance is realized during the delay period. However, we find that poor performance results in incrementally lower flows than that observed for non-window dressing managers. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 11-07.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:zbw:cfrwps:1107

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    Keywords: Mutual funds; Window dressing; Portfolio disclosure; Fund flows;

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    References

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    1. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, American Finance Association, vol. 62(2), pages 485-528, 04.
    2. Randolph Cohen & Joshua Coval & Lubos Pastor, 2002. "Judging Fund Managers by the Company They Keep," NBER Working Papers 9359, National Bureau of Economic Research, Inc.
    3. Agarwal, Vikas & Jiang, Wei & Tang, Yuehua & Yang, Baozhong, 2010. "Uncovering hedge fund skill from the portfolio holdings they hide," CFR Working Papers 10-09, University of Cologne, Centre for Financial Research (CFR).
    4. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
    5. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
    6. Mark M. Carhart & Ron Kaniel & David K. Musto & Adam V. Reed, 2002. "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 661-693, 04.
    7. Frank, Mary Margaret & Poterba, James M & Shackelford, Douglas A & Shoven, John B, 2004. "Copycat Funds: Information Disclosure Regulation and the Returns to Active Management in the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 47(2), pages 515-41, October.
    8. Gordon J. Alexander & Gjergji Cici & Scott Gibson, 2007. "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 20(1), pages 125-150, January.
    9. Malcolm Baker & Lubomir Litov & Jessica A. Wachter & Jeffrey Wurgler, 2004. "Can Mutual Fund Managers Pick Stocks? Evidence from the Trades Prior to Earnings Announcements," NBER Working Papers 10685, National Bureau of Economic Research, Inc.
    10. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 57-82, March.
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