Deception and Managerial Structure: A Joint Study of Portfolio Pumping and Window Dressing Practices

Abstract

This paper examines the relation between managerial structure and the likelihood of deception. Using U.S. equity mutual fund data, we find that team-managed funds deceive significantly less than single-managed funds. In particular, we show that two trading activities – portfolio pumping and window dressing, – which are considered illegal or quasi-illegal, are more profound or exists at all only among single-managed funds. We also document a negative relation between the extent of those two activities and team size. Subsequent tests indicate that these results are not driven by various fund characteristics that differ between single- and team-managed funds, such as fund returns, size, and turnover. In addition, we observe that portfolio pumping is present most strongly among the worst performing single-managed funds, while window dressing occurs primarily again among single-managed funds but in the middle performance group for which it has the largest potential benefits. Overall, our findings support the notion that team is a desirable form of organization as it helps weaken incentives to deceive.