THE JOURNAL OF FINANCE•VOL.LVII,NO.2•APRIL2002
Leaning for the Tape:Evidence of Gaming Behavior in Equity Mutual Funds
MARK M.CARHART,RON KANIEL,DAVID K.MUSTO,
and ADAM V.REED*
ABSTRACT
关于环保的图片
We prent evidence that fund managers inf late quarter-end portfolio prices with
last-minute purchas of stocks already held.The magnitude of price inf lation
ranges from0.5percent per year for large-cap funds to well over2percent for
small-cap funds.We find that the cross ction of inf lation matches the cross c-生命至上安全第一
澳洲移民tion of incentives from the f low0performance relation,that a surge of trading in
the quarter’s last minutes coincides with a surge in equity prices,and that the
inf lation is greatest for the stocks held by funds with the most incentive to inf late,
controlling for the stocks’size and performance.
Q UARTER-END AND ESPECIALLY YEAR-END equity mutual fund prices are abnor-mally high.We prent strong evidence that some mutual fund managers mark up their holdings at quarter end through aggressive trading of stocks they already hold.Funds with the greatest ability and most incentive to improve their performance exhibit the largest turn-of-quarter effect.Intra-daily data show a surge of transactions and transaction prices in the quar-ter’s last few minutes,and fund-holdings data show a larger effect in the funds with the most incentive to mark up.Considering that open-end equity funds intermediate$3.46trillion~year-end1999!,1this turn-of-quarter in-f lation of their prices is a significant opportunity for potential llers,and a significant hazard for everybody el.
In general,open-end domestic equity mutual funds calculate their net ast values per share~NAVs!from the closing transaction prices of their holdings.我爱你英文怎么写
*Carhart is from Goldman Sachs Ast Management,Kaniel is from the University of Texas, Musto is from the University of Pennsylvania,and Reed is from the University of North Carolina. The authors thank Marshall Blume;Mercer Bullard;Susan Christoffern;Dan Deli;Diane Del Guercio;Roger Edele
仿皮和真皮的区别n;Chris Geczy;Bruce Grundy;Don Keim;Alan Lee;Andrew Metrick;Rob Stambaugh;Laura Starks;Paula Tkac;Kent Womack;Jason Zweig;and minar participants at the Securities Exchange Commission,Iowa,Texas,and the Wharton School;participants in the Western Finance Association meeting in Sun Valley,Idaho;the Academic0Practitioners Con-ference on Mutual Funds at the Investment Company Institute;and RenéStulz and an anon-ymous referee for helpful comments and suggestions.Financial and other support from the Rodney L.White Center for Financial Rearch and the Wharton Financial Institutions Center is gratefully acknowledged.The views expresd are tho of the authors alone,and do not necessarily ref lect the views of Goldman Sachs Ast Management,Wharton,or UT.
奶昔英语1Investment Company Institute,Mutual Fund Fact Book,2000Edition,p.73.This figure excludes international funds.
661
662The Journal of Finance潮流的近义词
While there are obvious benefits from pricing off the most recent arms-length transactions,there are potential concerns as well.One of the,ex-plored by Chalmers,Edelen,and Kadlec~2000!,Boudoukh
房地产会计
et al.~2000!,and others,is the age of thinly traded stocks’last trades,which allows specula-tors to profit off longer-term shareholders.The concern we explore here is the inf luence of last-minute trading on last-trade prices,which allows fund managers to move performance between periods with last-minute trading in stocks they already hold,a practice alternately known as“painting the tape,”“marking up,”or“portfolio pumping.”Market regulators regard this practice as illegal.See Sugawara~2000!.
If managers mark up to move performance to one period from the next, the result is abnormally high NAVs at period ends.Becau of the signifi-cance of quarterly and annual performance figures,the ends of calendar quarters—particularly the fourth—are logical targets.We first establish that quarter-end distortion of NAVs is economically and statistically significant, then study fund returns,portfolio holdings,stock returns,and stock trades to determine whether the marking-up tactic is responsible.
We first establish the abnormal-NAV pattern around quarter ends.Equity fund returns,net of the S&P500,are abnormally high on the last day of the quarter,especially the fourth,and abnormally low the next day.This effect appears in both our databa of daily fund returns and in the Lipper daily fund indices.Magnitudes range from around50basis points per year for large-cap funds to well over200basis points for small-cap funds.There is little or no effect at month-ends that are not quarter-
ends.
We then focus in on the cau of the abnormal returns with a quence of tests on the cross ction of fund and stock returns.We confirm the link between the quarter-end ri and the next-day decline by showing that larger increas precede larger decreas in the cross ction,which is not the ca for fund returns on other days.
Next,to establish whether mutual fund managers are actively involved, we check if funds with relatively more incentive to mark up do in fact show more marking up.We test two hypothes.First,funds just below the S&P 500for the year mark up to beat the index~Zweig~1997!!,which we call “benchmark-beating.”Second,funds with the best performance mark up to improve their year-end ranking and to profit from the convexity of the f low0 performance relation~Ippolito~1992!,Sirri and Tufano~1998!!and manage-rial incentive pay.We denote this as the“leaning-for-the-tape”hypothesis. Despite its intuitive appeal,we reject the benchmark-beating hypothesis. As Degeorge,Patel,and Zeckhaur~1999!obrve,manipulation of a sta-tistic to beat a benchmark should distort the empirical distribution of the statistic around the benchmark.In the empirical distribution of funds’calendar-year returns,there is no distortion around the S&P return,such as De-george,Patel,and Zeckhaur find in corporate-earnings numbers around analysts
’expectations,and no distortion around zero return.
However,we find significant evidence supporting the leaning-for-the-tape hypothesis.We find that the year’s best-performing funds have the largest
Evidence of Gaming Behavior in Equity Mutual Funds663 abnormal year-end return reversals,and the quarter’s best-performing funds have the largest abnormal quarter-end return reversals.Intraday data iso-late much of the pattern in a small window of trading time around the quarter-end day’s clo.Finally,we find that the stocks in the disclod portfolios of the best-performing funds,controlling for capitalization and recent return, show significantly more price inf lation at year-end than do other stocks.We conclude that marking up by mutual funds explains some,if not all,of the price inf lation.
The rest of the paper is in five ctions.Section I covers the relevant literature on equity and equity-fund returns,and Section II tests for NAV inf lation at period-ends.Section III prents evidence from the cross ction of fund returns.Section IV tests for marking up on transactions data,and Section V summarizes and concludes.
I.Background and Literature
Two literatures relate to regularities in equity-fund returns:the extensive literature on equity-return asonality,and the more recent literature on equity-fund-return asonality,which is qualitatively different in both caus and implications.We cover each brief ly,then describe the main hypothes of this paper in the context of the literature on equity-fund agency issues, particularly tho relating to the effect of fund performance on net cash f lows.
A.Literature on Equity Return Seasonality
The finance literature has uncovered and analyzed many peculiarities in equity returns in the days around the year-end.Most attention has focud on small-cap issues.Relative to big-cap stocks,small-cap stocks shift signif-icantly upward on each of the five trading days starting with the last of the year~Keim~1983!,Roll~1983!!with a persistence across years that defies risk-bad explanations.Explanations include tax-loss lling and window dressing.Tax-loss lling implies that retail investors’demand for stocks with poor past performance shifts up after the year-end tax , Roll~1983!,and e Ritter~1988!for evidence that sale proceeds are“parked”for a while!.Similarly,window dressing implies that institutional demand for prior poor performers shifts up after year-end portfolio , Haugen and Lakonishok~1988!,Musto~1997!!.Neither explains why the shift starts a day before the year-end.2
2U.S.mutual funds~with a few exceptions!u trade dateϩ1positions in calculating their daily NAV.Therefore,any changes in position that occur through trading on the last day of the year are not ref lected in that day’s NAV,but rather in the next day’s NAV.However,U.S.GAAP requires that miannual mutual fund reports ref lect trade date positions,so the trades would be obrved in the financial statements of funds with calendar fiscal years.
664The Journal of Finance
Lining up daily index returns from1963to1981around month ends,Ariel ~1987!isolates all of equities’positive average returns in the nine trading days starting with the last of the month.Various explanations are consid-ered and discarded.Sias and Starks~1997!find that greater institutional ownership is associated with relatively better returns in the last four days of the year,and relatively wor in the first four days of the year,and conclude that individual-investor tax-loss lling explains their finding.However,the average returns are virtually the same over the two periods,so they con-clude it is actually the unusually poor performance of low institutional own-ership stocks at the end of the year,and their good performance at the beginning of the year,that drives their results.
At the intraday frequency,Harris~1989!shows that transaction prices systematically ri at the clo,
and that this“day-end”anomaly is largest at month-ends~the study did not consider quarter-or year-ends parately! and when the last transaction is very near to the clo in time.Harris also finds that the effect is stronger for low-priced firms and that buyers more frequently initiate day-end transactions.
The literature also documents price shifts directly traceable to institu-tional money management.Harris and Gurel~1986!show that prices on new constituents of the S&P500index abnormally increa more than three per-cent upon announcement,all of which is eliminated within two weeks.Lynch and Mendenhall~1997!,studying a period when S&P additions and dele-tions were announced veral trading days in advance,show transaction prices to be temporarily low on deletion days and high on addition days,and Reed~2000!confirms this for Rusll2000additions and deletions.This effect is understood to be caud by the rebalancing trades of index managers.
B.Literature on Equity-fund Return Seasonality
It might em redundant to measure the asonality of equity-fund re-turns,becau we might expect to e only the previously discusd equity-return patterns.But the return on an equity fund is fundamentally different from the return on an equity,and the significance of this difference is only recently being addresd in the literature.
An equity return reprents the difference between the prices of two arms-length transactions.It tells us what an investor would have earned if he bought at the initial price and sold at the later price.We cannot know how much,if any,another investor could have transacted at the prices,as they are specific to the size and direction,and possibly other circumstances,of tho two trades.In many cas,we abstract from transaction times,which is a minor concern for heavily traded stocks but not for the sparly traded ones.An alternative is to look instead at bid and ask prices,but the,too, are only relevant for trades of a specific size.
An equity-fund return reprents the difference between two NAV calcu-lations,where each NAV is calculated from the closing prices of the fund’s holdings on their respective primary exchanges.In contrast to an equity
Evidence of Gaming Behavior in Equity Mutual Funds665 price,the NAV is the actual transaction price ud for purchas and re-demptions of fund shares after the clo that day.However,it is unlikely that an investor could purcha or ll all of the fund’s equity positions at the closing prices ud to calculate NAV.So NAVs directly reprent the experience of hypothetical investors,without the guesswork and error,but they can depart from the“equilibrium”value of fund shares whenever equities’closing prices depart from their equilibrium values.When this departure is predictable,investo
rs have a trading rule who profits derive from the funds’other shareholders.
Some recent studies illustrate the predictability caud by nonsynchro-nous trading.Nonsynchroneity is most extreme in funds holding non-U.S. equities that price the holdings using closing trades on their home ex-change,yet allow fund purchas and redemptions up to the clo of U.S. trading~Goetzmann,Ivkovic,and Rouwenhorst~2000!!.But even purely do-mestic funds allow arbitrage to the extent they hold equities who last trades tend to precede the market ,Boudoukh et al.~2000!,Chal-mers et al.~2000!,Greene and Hodges~2000!!.The profit opportunities are sporadic and require good estimates of the magnitude of market moves between non-U.S.and U.S.market clos for international funds,or shortly before the U.S.clo for funds holding illiquid stocks.
In the popular press,Zweig~1997!demonstrates year-end asonality in equity funds,and offers an explanation.From1985to1995,the average equity fund outperformed the S&P500by53bp~bpϭbasis points,10100of one percent!on the year’s last trading day,and under performed by37bp on the next year’s first trading day.Small-cap funds shifted more:103bp above the S&P,then60bp below.This does not match the price shifts of small-cap equity indices,which generally beat the market on both days in tho years. The explanation offered is that some fund managers cau the pattern by mani
pulating year-end valuations to improve their fund’s return.
In SEC terminology,“marking the clo”is“the practice of attempting to inf luence the closing price of a stock by executing purcha or sale orders at or near the clo of the market”~e Kocherhans~1995!!.Zweig~1997!pro-pos that the fund managers just short of the S&P500on the year’s pen-ultimate trading day try to pass it by marking the last day’s clo with buys. At the least,they could simply increa the probability their holdings clo at the ask,but with more aggressive purchas,they could push up both the bid and the ask.Either way,this“marking up”would result in inf lated NAVs and thereby inf lated returns for holding periods ending on that date, and correspondingly de f lated returns over periods beginning then.
C.Two Models of the Marking-up Strategy
We consider two models,not mutually exclusive,of the marking-up strat-egy.The first is the scenario just described in which managers mark up to beat the S&P,which we label the“benchmark-beating”model.The idea that funds mark up to beat the S&P500has intuitive appeal;a fund’s success at
