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Window Dressing in Mutual Funds

The Review of Financial Studies, Forthcoming

62 Pages Posted: 9 Apr 2011 Last revised: 17 Jun 2014

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Gerald D. Gay

Georgia State University - Department of Finance

Leng Ling

Georgia College & State University

Date Written: June 16, 2014

Abstract

We provide a rationale for window dressing where investors respond to conflicting signals of managerial ability inferred from a fund’s performance and disclosed portfolio holdings. We contend that window dressers take a risky bet on their performance during a reporting delay period, which affects investors’ interpretation of the conflicting signals and hence their capital allocations. Conditional on good (bad) performance, window dressers benefit from higher (lower) investor flows as compared to non-window dressers. Window dressers also have poor past performance, possess little skill, and incur high portfolio turnover and trade costs, characteristics which in turn result in worse future performance.

Keywords: Mutual funds, Window dressing, Portfolio disclosure, Fund flows

JEL Classification: G11, G20

Suggested Citation

Agarwal, Vikas and Gay, Gerald D. and Ling, Leng, Window Dressing in Mutual Funds (June 16, 2014). The Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1804939 or http://dx.doi.org/10.2139/ssrn.1804939

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Gerald D. Gay

Georgia State University - Department of Finance ( email )

Robinson College of Business
Atlanta, GA 30303-3083
United States
404-413-7321 (Phone)
404-413-7312 (Fax)

Leng Ling (Contact Author)

Georgia College & State University ( email )

Milledgeville, GA 31061-0490
United States

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