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

  • Author(s): Mark M. Carhart, Ron Kaniel, David K. Musto, Adam V. Reed
  • Published: Dec 17, 2002
  • Pages: 661-693
  • DOI: 10.1111/1540-6261.00438

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.

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