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Performance inconsistency in mutual funds: An investigation of window-dressing behavior

Agarwal, Vikas
Gay, Gerald D.
Ling, Leng
Year of Publication: 
Series/Report no.: 
CFR Working Paper 11-07 [rev.]
This paper develops two measures of performance inconsistency based on information derived from funds' actual performance and their disclosed portfolio holdings. Using these measures, we show that funds with unskilled managers and poor performance are associated with greater inconsistency. Further, inconsistency exhibits seasonality and relates negatively to future performance. Together, this evidence suggests that inconsistency is driven by window dressing rather than stock selection. Finally, we characterize and provide empirical support for an equilibrium of window dressing in the presence of rational investors by examining their capital allocation decisions.
mutual funds
window dressing
portfolio disclosure
fund flows
Document Type: 
Working Paper

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