Window Dressing and Equity Mutual Funds

Abstract

This paper documents that, consistent with the practice of window dressing, equity mutual funds exhibit atypical return behavior around fiscal year-ends. To identify atypical returns, residuals from a multiple-style index market model are generated for a sample of large equity mutual funds. Absolute market-model residuals are found to be larger in magnitude surrounding the days of a fiscal year-end than at other times of the year, suggesting an altered return-generation process. Further, the residuals are more negative around fiscal year-ends, suggesting increased trading costs to unwind cosmetic portfolio holdings. While related to the calendar year-end portfolio pumping identified in previous research, the difference in month-end residuals between fiscal year-end and non-fiscal year-end funds is similar in magnitude whether or not the month is December.