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Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

Posted: 19 Nov 2002  

Mark M. Carhart

Kepos Capital LP

Adam V. Reed

University of North Carolina Kenan-Flagler Business School

Ron Kaniel

University of Rochester - Simon Business School; CEPR

David K. Musto

University of Pennsylvania - Finance Department

Abstract

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.

Suggested Citation

Carhart, Mark M. and Reed, Adam V. and Kaniel, Ron and Musto, David K., Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds. The Journal of Finance, Vol. 57, pp. 661-693, 2002. Available at SSRN: https://ssrn.com/abstract=309177

Mark M. Carhart (Contact Author)

Kepos Capital LP ( email )

*** temporary contact info***
666 Fifth Avenue, 37th Floor
New York, NY 10103
United States
(212) 520-7881 (Phone)
(212) 520-7884 (Fax)

HOME PAGE: http://www.keposcapital.com

Adam V. Reed

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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