Missing the Marks: Dispersion in Corporate Bond Valuations Across Mutual Funds

Abstract:     
We study the dispersion of month-end valuations placed on identical corporate bonds by different mutual funds. Such dispersion is related to bond-specific characteristics associated with liquidity and market volatility. Tests suggest that FINRA’s transparency-enhancing TRACE system has increased the precision of corporate bond valuation to the benefit of investors. Other tests reveal the marking patterns of a minority of funds to be associated with return smoothing behavior. However, funds with explicit, self-disclosed marking standards do not appear to smooth returns. These findings suggest that the SEC should require every fund to commit to an explicit marking standard in its prospectus.

Keywords: mutual funds, bonds, valuation, fair value

JEL Classifications: G19, G29

Working Paper Series