Painting the tape: Aggregate evidence

Bernhardt, Dan; Davies, Ryan J.

doi:10.1016/j.econlet.2005.06.015

Cited by 49 publications

(21 citation statements)

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“…In contrast, the mean return is 0.20 percent over the other days of Turn of the Quarter. Bernhardt and Davies (2005) and Carhart, Kaniel, Musto, and Reed (2002) reported that calendar quarter-ends often have high daily returns. They attributed this effect to fund managers deliberately trading at above-market prices near the close of the market at calendar quarter-ends so as to boost the mark-to-market performance of their funds.…”

Section: A Closer Lookmentioning

confidence: 99%

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Equity Returns at the Turn of the Month

McConnell

2008

Financial Analysts Journal

106

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The turn-of-the-month effect in U.S. equities is found to be so powerful in the (L&S 1988) appear to have been the first to document a turn-of-themonth effect in equity returns, with the turn of the month beginning on the last trading day of the month and ending on the third trading day of the following month. Using the Dow Jones Industrial Average, they found that the four days at the turn of the month accounted for all of the positive return to the DJIA in the 90-year period of 1897-1986. Specifically, in this period, the average cumulative return over the four-day turn of the month was 0.473 percent whereas for the full month, the average cumulative return was 0.349 percent, indicating that returns were, on average, negative over the remaining days of the month. Because the turnof-the-month effect was not their primary concern, L&S did not explore this pattern in depth.We took up the task of examining the turn-ofthe-month effect in detail in the study reported here. For the U.S. market, we used CRSP daily returns for the 80-year period of 1926-2005. As Schwert (2003 noted, return patterns that appear during a particular time period often disappear once they have been discovered or, upon closer scrutiny, turn out not to have existed to begin with. Therefore, and given that the L&S study ends with 1986, an obvious starting point for our analysis was the 19-year period that has transpired since the end of the period they examined. We found that the pattern in returns during the 1987-2005 period is remarkably similar to the pattern in the earlier period.Having established that the turn-of-the-month pattern has persisted in the U.S. equity market during the recent two decades, we turned to the more consequential task of investigating returns during the 80-year interval of 1926-2005 to determine whether the pattern is attributable to certain sets of stocks-small-capitalization or low-price stocks. We then carried out a variety of tests to determine whether the effect results primarily from returns at the turn of the year or at calendar quarterends, whether higher risk at the turn of the month can explain the pattern, and whether U.S. Treasury securities and corporate bonds exhibit a turn-ofthe-month pattern. In addition, we considered whether the volume of trade or the net flow of funds to equity mutual funds supports Ogden's (1990) hypothesis that the turn-of-the-month effect is caused by "regularity in payment" dates, which we call the "payday hypothesis."We also looked for a turn-of-the-month pattern in other countries for hints as to whether the pattern is universal or results from some peculiarity in the U.S. trading structure. As we show, the turn-of-themonth effect is not confined to the United States. Prior StudiesWe are not the first to expand upon the L&S study. Nearly contemporaneous with L&S was a study by examining several calendaryear effects, including the January, the holiday, and the day-of-the-week effects. They reported that the turn-of-the-month effect occurred in the 1897-1986 period. Hens...

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Section: A Closer Lookmentioning

confidence: 99%

“…For the U.S. market, we used CRSP daily returns for the 80-year period of 1926-2005. As Schwert (2003 noted, return patterns that appear during a particular time period often disappear once they have been discovered or, upon closer scrutiny, turn out not to have existed to begin with.…”

Section: John J Mcconnell and Wei Xumentioning

confidence: 99%

Equity Returns at the Turn of the Month

McConnell

2008

Financial Analysts Journal

106

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“…Indeed, Bernhardt and Davies (2005) find that strategic trading by fund managers appears to impact returns on aggregate market indexes, so that measuring the impact relative to the index, as Carhart et al (2002) do, understates the total effect. Specifically, daily returns of the equally weighted index on the last trading day of a quarter greatly exceed the daily returns on the first trading day of the succeeding quarter, and this return difference rises with the share of total equity held by mutual funds.…”

Section: Related Literaturementioning

confidence: 99%

Smart fund managers? Stupid money?

Bernhardt

Davies

2009

Canadian J of Economics

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We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short-term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.JEL Classification: D82, G2, G14. Keywords: turn-of-quarter effect, painting the tape, mutual fund performance, investment distortion. * Richard Martin's master's essay under the direction of the first author was a building point for this research. We greatly appreciate Harvey Westbrook Jr.'s significant contributions to early drafts. We are also grateful for comments received from two anonymous referees, Chris Brooks, Murillo Campello, Duane Seppi, and seminar participants at Queen's University, St. Francis Xavier University, the Northern Finance Association meetings, the Financial Management Association European meetings, and the Multinational Finance Society meetings. We develop a model of mutual fund manager investment decisions near the end of quarters.We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short-term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.JEL Classification: D82, G2, G14.

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“…Several studies have analyzed the different incentives and consequences of this behavior on return patterns around reporting dates (Bernhardt and Davies, 2005;Carhart et al, 2002;Gallagher et al, 2009), with a special interest in the role of this institutional practice in some well-known market anomalies such as the January effect (Ackert and Athanassakos, 2000;Haugen and Lakonishok, 1988;Lee et al, 1998;Musto, 1997;Ng and Wang, 2004;Sias and Starks, 1997).…”

Section: Introductionmentioning

confidence: 99%

Mutual Fund Trading and Portfolio Disclosures

2014

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AcknowledgementsThe authors would like to thank the UCEIF Foundation and the research project 268-159 of the University of Zaragoza for their financial support. The authors are also grateful to José Luis Sarto and Auke Plantinga for their insightful comments and suggestions. Any possible errors contained in this article are the exclusive responsibility of the authors. Mutual Fund Trading and Portfolio Disclosures AbstractThis paper analyzes a unique database of monthly portfolio holdings of a large sample of Spanish domestic equity funds to test the potential manipulation of the disclosed portfolios in mandatory reports. Both trading activity measures and a new approach based on portfolio allocations both show significant differences in the investment patterns of mutual funds depending on the trading month. The results indicate that, in the reporting months, fund managers prefer large-cap and well-known stocks (i.e., Ibex-35 stocks) with incentives to increase the disclosed portfolio share of return-winners and decrease the weight of returnloser stocks. In addition, the results show that mutual funds participate actively in the January effect through the buy of small-cap stocks at the beginning of the year. Nevertheless, mutual funds own a low percentage of the total Spanish stock market capitalization, which suggests that fund managers are taking advantage of this anomaly rather than causing the January effect.EFM classification: 370, 530.

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Painting the tape: Aggregate evidence

Cited by 49 publications

References 5 publications

Equity Returns at the Turn of the Month

Equity Returns at the Turn of the Month

Smart fund managers? Stupid money?

Mutual Fund Trading and Portfolio Disclosures

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