Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds


  • Mark M. Carhart,

  • Ron Kaniel,

  • David K. Musto,

  • Adam V. Reed

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    • Carhart is from Goldman Sachs Asset 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 Christoffersen; Dan Deli; Diane Del Guercio; Roger Edelen; Chris Geczy; Bruce Grundy; Don Keim; Alan Lee; Andrew Metrick; Rob Stambaugh; Laura Starks; Paula Tkac; Kent Womack; Jason Zweig; and seminar participants at the Securities Exchange Commission, Iowa, Texas, and the Wharton School; participants in the Western Finance Association meeting in Sun Valley, Idaho; the Academic/Practitioners Conference on Mutual Funds at the Investment Company Institute; and René Stulz and an anonymous referee for helpful comments and suggestions. Financial and other support from the Rodney L. White Center for Financial Research and the Wharton Financial Institutions Center is gratefully acknowledged. The views expressed are those of the authors alone, and do not necessarily reflect the views of Goldman Sachs Asset Management, Wharton, or UT.


We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter's last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks' size and performance.