IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Performance inconsistency in mutual funds: An investigation of window-dressing behavior

  • Agarwal, Vikas
  • Gay, Gerald D.
  • Ling, Leng
Registered author(s):

    This paper develops two measures of performance inconsistency based on information derived from funds' actual performance and their disclosed portfolio holdings. Using these measures, we show that funds with unskilled managers and poor performance are associated with greater inconsistency. Further, inconsistency exhibits seasonality and relates negatively to future performance. Together, this evidence suggests that inconsistency is driven by window dressing rather than stock selection. Finally, we characterize and provide empirical support for an equilibrium of window dressing in the presence of rational investors by examining their capital allocation decisions.

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

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

    as
    in new window

    Length:
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:zbw:cfrwps:1107r
    Contact details of provider: Postal: 0221 / 470 5607
    Phone: 0221 / 470 5607
    Fax: 0221 / 470 5179
    Web page: http://cfr-cologne.de/english/version06/html/home.php
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Laura T. Starks & Li Yong & Lu Zheng, 2006. "Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds," Journal of Finance, American Finance Association, vol. 61(6), pages 3049-3067, December.
    2. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-31, May.
    3. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
    4. Honghui Chen & Vijay Singal, 2004. "All Things Considered, Taxes Drive The January Effect," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 351-372.
    5. Jennifer Huang & Kelsey D. Wei & Hong Yan, 2007. "Participation Costs and the Sensitivity of Fund Flows to Past Performance," Journal of Finance, American Finance Association, vol. 62(3), pages 1273-1311, 06.
    6. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    7. Sias, Richard W & Starks, Laura T, 1997. " Institutions and Individuals at the Turn-of-the-Year," Journal of Finance, American Finance Association, vol. 52(4), pages 1543-62, September.
    8. Chen, Hsiu-Lang & Jegadeesh, Narasimhan & Wermers, Russ, 2000. "The Value of Active Mutual Fund Management: An Examination of the Stockholdings and Trades of Fund Managers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 343-368, September.
    9. Paul A. Gompers & Andrew Metrick, . "Institutional Investors and Equity Prices," Rodney L. White Center for Financial Research Working Papers 20-99, Wharton School Rodney L. White Center for Financial Research.
    10. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2008. "Unobserved Actions of Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2379-2416, November.
    11. Richard W. Sias & Laura T. Starks, 2006. "Changes in Institutional Ownership and Stock Returns: Assessment and Methodology," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2869-2910, November.
    12. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, vol. 62(2), pages 485-528, 04.
    13. 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, vol. 57(2), pages 661-693, 04.
    14. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    15. 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, vol. 47(2), pages 515-41, October.
    16. Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
    17. Matthew R. Morey & Edward S. O'Neal, 2006. "Window Dressing In Bond Mutual Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(3), pages 325-347.
    18. Ritter, Jay R & Chopra, Navin, 1989. " Portfolio Rebalancing and the Turn-of-the-Year Effect," Journal of Finance, American Finance Association, vol. 44(1), pages 149-66, March.
    19. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    20. 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.
    21. Mark Grinblatt & Sheridan Titman, . "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," Rodney L. White Center for Financial Research Working Papers 23-88, Wharton School Rodney L. White Center for Financial Research.
    22. Cohen, Randolph & Coval, Joshua & Pástor, Luboš, 2003. "Judging Fund Managers by the Company They Keep," CEPR Discussion Papers 3717, C.E.P.R. Discussion Papers.
    23. Vikas Agarwal & Naveen D. Daniel & Narayan Y. Naik, 2011. "Do Hedge Funds Manage Their Reported Returns?," Review of Financial Studies, Society for Financial Studies, vol. 24(10), pages 3281-3320.
    24. Jiang, George J. & Yao, Tong & Yu, Tong, 2007. "Do mutual funds time the market? Evidence from portfolio holdings," Journal of Financial Economics, Elsevier, vol. 86(3), pages 724-758, December.
    25. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
    26. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, 08.
    27. 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, vol. 20(1), pages 125-150, January.
    28. Khorana, Ajay, 1996. "Top management turnover An empirical investigation of mutual fund managers," Journal of Financial Economics, Elsevier, vol. 40(3), pages 403-427, March.
    29. Ng, Lilian & Wang, Qinghai, 2004. "Institutional trading and the turn-of-the-year effect," Journal of Financial Economics, Elsevier, vol. 74(2), pages 343-366, November.
    30. Jia He, 2004. "Quarterly Trading Patterns of Financial Institutions," The Journal of Business, University of Chicago Press, vol. 77(3), pages 493-510, July.
    31. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
    32. James M. Poterba, 2001. "Capital Gains Tax Rules, Tax-loss Trading, and Turn-of-the-year Returns," Journal of Finance, American Finance Association, vol. 56(1), pages 353-368, 02.
    33. K. J. Martijn Cremers & Antti Petajisto, 2009. "How Active Is Your Fund Manager? A New Measure That Predicts Performance," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3329-3365, September.
    34. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
    35. Baker, Malcolm & Litov, Lubomir & Wachter, Jessica A. & Wurgler, Jeffrey, 2010. "Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(05), pages 1111-1131, October.
    36. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    37. Daniel, Kent, et al, 1997. " Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-58, July.
    38. David K. Musto, 1999. "Investment Decisions Depend on Portfolio Disclosures," Journal of Finance, American Finance Association, vol. 54(3), pages 935-952, 06.
    39. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
    40. Solomon, David H. & Soltes, Eugene & Sosyura, Denis, 2014. "Winners in the spotlight: Media coverage of fund holdings as a driver of flows," Journal of Financial Economics, Elsevier, vol. 113(1), pages 53-72.
    41. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    42. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:zbw:cfrwps:1107r. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.