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Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds
Author(s) -
Carhart Mark M.,
Kaniel Ron,
Musto David K.,
Reed Adam V.
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00438
Subject(s) - equity (law) , portfolio , monetary economics , incentive , quarter (canadian coin) , inflation (cosmology) , economics , business , finance , physics , archaeology , theoretical physics , political science , law , microeconomics , history
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.