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Does Mutual Funds’ Window-Dressing Status Affect Investee Firms’ Earnings Management?

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  • Hyung Tae Kim
  • Hyungshin Park

Abstract

We examine the link between agency issues in the mutual fund industry and the earnings reporting behavior of investee firms. Prior research indicates that some active fund managers engage in window-dressing practices, removing securities that may reflect badly on their investing skills from the list of mandatorily-reported holdings. We identify funds that are likely to engage in such practices and document that the holdings of these window-dressers are more sensitive to investee firms’ earnings news, specifically that window-dressers sell their holdings more aggressively following negative news. We find that aggressive trading by window-dressers, along with potential front-running by other funds, results in greater price reactions of the investee firms’ stocks to earnings news. This incentivizes the managers of the investee firms to engage in earnings management to meet or beat earnings forecasts. We also find that these investee firms are more likely to report a positive earnings surprise prior to equity offerings and less likely to do so after a CEO change.

Suggested Citation

  • Hyung Tae Kim & Hyungshin Park, 2026. "Does Mutual Funds’ Window-Dressing Status Affect Investee Firms’ Earnings Management?," European Accounting Review, Taylor & Francis Journals, vol. 35(1), pages 205-235, January.
    • Handle: RePEc:taf:euract:v:35:y:2026:i:1:p:205-235
    DOI: 10.1080/09638180.2025.2497313
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