Do Mutual Funds Manipulate Star Ratings? Evidence from Portfolio Pumping

62 Pages Posted: 19 Aug 2019 Last revised: 7 Jan 2022

See all articles by Sanghyun (Hugh) Kim

Sanghyun (Hugh) Kim

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: January 5, 2022

Abstract

This paper reveals that mutual funds manipulate Morningstar's star ratings by inflating their month-end portfolio values when they are likely to finish the month near rating cutoffs. This star rating manipulation is more pronounced among funds with greater incentives and abilities to pump their portfolios and manipulate star ratings. Following heightened regulatory scrutiny, portfolio pumping to manipulate star ratings has largely migrated from quarter/year-ends to less prominent month-ends. Improving star ratings, portfolio pumping increases fund flows, especially in the month of a rating upgrade. Placebo tests exploiting the June 2002 change in Morningstar rating methodology yield expected null effects.

Keywords: Morningstar ratings, managerial incentives, mutual funds, portfolio pumping, performance manipulation

JEL Classification: G23, G24, G28, K22

Suggested Citation

Kim, Sanghyun (Hugh), Do Mutual Funds Manipulate Star Ratings? Evidence from Portfolio Pumping (January 5, 2022). Available at SSRN: https://ssrn.com/abstract=3429450 or http://dx.doi.org/10.2139/ssrn.3429450

Sanghyun (Hugh) Kim (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 2051 - 64 University Ave W
Waterloo, Ontario N2L 3C7
Canada

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