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Vikas Agarwal, Gerald D. Gay, Leng Ling, Window Dressing in Mutual Funds, The Review of Financial Studies, Volume 27, Issue 11, November 2014, Pages 3133–3170, https://doi.org/10.1093/rfs/hhu045
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Abstract
We provide a rationale for window dressing wherein investors respond to conflicting signals of managerial ability inferred from a fund's performance and disclosed portfolio holdings. We contend that window dressers make a risky bet on their performance during a reporting delay period, which affects investors' interpretation of the conflicting signals and hence their capital allocations. Conditional on good (bad) performance, window dressers benefit (suffer) from higher (lower) investor flows compared with non–window dressers. Window dressers also show poor past performance, possess little skill, and incur high portfolio turnover and trade costs, characteristics which in turn result in worse future performance.