Empirical Research On The Window-dressing Effect Of Open-ended Equity Mutual Funds In China

There are double principal-agent relationships among mutual funds, fund managers and investors. For delegated investment, because the three subjects'interests are inconsistent, it is easy to generate agency problems such as moral hazard and so on, particularly under such circumstances with information asymmetry and incomplete information. Considering their personal reputation and future careers, fund managers prone to buy winners and sell losers before portfolio holdings reports are going to be disclosed to the public. These behaviors aim at removing particularly embarrassing positions from his book and improving the funds' performance. The phenomenon is usually called "Window dressing".Based on the share holdings of funds published in the report, this paper investigates whether there is windowing dressing in open-end equity mutual funds in our Chinese market. The research is developed from two aspects:the trading behaviors of fund managers and the characteristics of realized fund returns showed by the reported portfolio. For the trading behaviors of fund managers, we fund they tend to buy winners and sell losers; as regard to the characteristics of realized fund returns, we prove that compared to other times, fund managers have different stock investment preferences when they have to reporting portfolios. Then in order to distinguish window-dressed funds from non-window-dressed funds effectively, we develop two indexes which can measure the degree of fund managers "window dressing" share holdings.This paper do further empirical tests to rule out "momentum hypotheses". First, using Fama-French's four-factors model to regress each fund's time sequence of returns during the whole sample period, we find that the momentum factor can not effectively explain fund returns. Secondly, in comparison with funds'abnormal return on reported months with non reported months, we prove that funds gain higher returns in reported months than non reported months; window-dressed funds earn more than non-window-dressed funds in reported month, but earn less in the next period, which shows an obvious reversal tendency. Finally, this paper examines which factor may influence fund managers' window dressing behaviors. We conclude that growth funds and funds with poor recent performance and with higher stock investment ratio are more likely to be "window dressers"; fund managers tend to window dressing portfolios in bull market and in year-end months.