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

Mark M. Carhart, Ron Kaniel, David K. Musto and Adam V. Reed
The Journal of Finance
Vol. 57, No. 2 (Apr., 2002), pp. 661-693
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/2697754
Page Count: 33
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Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds
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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.

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