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Mutual fund flows and window-dressing

Leng Ling and J. J. Arias

The Quarterly Review of Economics and Finance, 2013, vol. 53, issue 4, 440-449

Abstract: We use a sequential game to analyze an agency problem in the mutual fund industry where a representative fund manager considers window-dressing his portfolio holdings for the purpose of attracting fund flows from a representative investor. The manager is motivated to window-dress to improve the investor's perception of managerial skill which may positively affect fund flows in the next period. However, the investor may suspect window-dressing and thus downgrade perceived managerial skill. The model supports a Bayesian Nash equilibrium where the manager window-dresses only when receiving a low return in the first period and the investor withdraws funds only when observing low returns in both periods. Consequently, we show that window-dressing is a rational behavior even when fund outflows may result.

Keywords: Mutual funds; Window-dressing; Fund flows (search for similar items in EconPapers)
JEL-codes: G11 G20 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.qref.2013.05.003

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