Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds
Mark M. Carhart
Kepos Capital LP
Adam V. Reed
University of North Carolina Kenan-Flagler Business School
University of Rochester - Simon School of Business; CEPR
David K. Musto
University of Pennsylvania - Finance Department
The Journal of Finance, Vol. 57, pp. 661-693, 2002
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.
Accepted Paper Series
Date posted: November 19, 2002
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