Portfolio Pumping and Managerial Structure

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.