Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

doi:10.1111/1540-6261.00438

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Wiley InterScience

The Journal of Finance

Volume 57 Issue 2, Pages 661 - 693

Published Online: 17 Dec 2002

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Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

Mark M. Carhart , Ron Kaniel , David K. Musto & Adam V. Reed

¹ Goldman Sachs Asset Management, ² University of Texas, ³ University of Pennsylvania, ⁴ University of North Carolina

ABSTRACT

We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/1540-6261.00438 About DOI