Valuation Risk in Mutual Fund Portfolio Disclosure

55 Pages Posted: 11 Jun 2021 Last revised: 13 Jun 2021

See all articles by Hsiu-Lang Chen

Hsiu-Lang Chen

University of Illinois at Chicago - Department of Finance

Date Written: May 12, 2021

Abstract

Valuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly listed stocks valued differently across mutual funds. An equity fund that has positive price dispersion in its portfolio holdings, that performs poorly, that belongs to a fund family with an inclination for aggressive reporting, that holds more stocks subject to stale prices, that holds more pre-IPO firms, or that experiences net outflows will tend to show positive price dispersion again in the next quarter. This behavior is significant in a volatile market. Aggressive reporting helps funds gain in the mutual fund tournament.

Keywords: Fair Value; Valuation Risk; Mutual Funds

JEL Classification: G10; G23

Suggested Citation

Chen, Hsiulang, Valuation Risk in Mutual Fund Portfolio Disclosure (May 12, 2021). Available at SSRN: https://ssrn.com/abstract=3864672 or http://dx.doi.org/10.2139/ssrn.3864672

Hsiulang Chen (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2119 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 355-1024 (Phone)

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