Opportunistic Behavior In Equity Fund

As a collection of institutional investors with information advantage,specialization advantage and capital scale advantage,equity funds are regarded as the "stabilizer" of the stock market,and have become the stock selection reference and investment wind vane for many individual investors.However,due to the fund’s substantial agency investment attributes,this principal-agent structure also provides space and possibility for funds to seek private profit and implement opportunistic behavior.The end-of-quarter window-dressing of funds and the gambling transactions of preferring "lottery-type" stocks,as confirmed by many documents,are regarded as typical manifestations of opportunistic behaviors carried out by funds in pursuit of maximizing their own returns.Specifically in China’s stock market,with the implementation of the "extraordinary development plan" for institutional investors in 2004,stock funds have been developing rapidly,and indirectly entering the market by purchasing funds has also become an important way for individual investors to participate in stock investment in China.Undeniably,funds play a great role in strengthening external supervision of listed companies,stabilizing market fluctuations and mining market information.However,at the same time,the relatively lagging information disclosure mechanism of China’s stock market and the unsoundness of fund managers’ professional reputation constraint mechanism may,to a certain extent,amplify the reverse incentives for funds to implement opportunistic behaviors for self-interested goals.In view of this,in order to reveal the characteristics and causes of opportunistic behavior in funds,this article takes Chinese stock funds as a sample and regards them as agents in a typical principal-agent framework.Based on the recognition of the existence of selfish preferences in funds,this article follows the"performance impact,causes,interaction characteristics,and governance strategies" of opportunistic behavior in funds.Referring to relevant research,fund opportunistic behavior is decomposed into two typical types:window-dressing behavior and gambling style trading behavior.By providing empirical identification of the existence of fund opportunistic behavior,and based on the analysis of the performance impact and causes of fund opportunistic behavior,the interactive characteristics between different opportunistic behaviors of funds are analyzed.Finally,the focus is on the governance effect of the specific institutional arrangement of fund managers holding funds on fund window-dressing behavior and gambling style trading,in order to explore effective governance mechanisms to suppress fund opportunistic behavior and alleviate the problem of fund agents.Firstly,this paper analyzes the window-dressing behavior of funds.The empirical findings show that China’s equity funds do have the window-dressing behavior of concentrating on buying "good stocks" and selling "bad stocks" before the disclosure of end-of-quarter results in order to raise the performance,and from the perspective of performance impact,although the fund window-dressing results in the rate of return shows an increase in the rate of decline at the beginning of the quarter and a decrease in the rate of decline at the beginning of the quarter.rate and the beginning of the quarter decline rate of the incremental characteristics of time decay,but overall fund window-dressing behavior of the "performance penalty" effect is significant,the fund’s window-dressing behavior whether on the future short-term performance(the next three months)or on the long-term performance(the next one year and two years)have a negative impact.The reason why fund companies continue to window-dress under the "performance penalty" effect is that window-dressing will make the fund’s performance relatively better in the delayed period(year-end to the point of disclosure),and this will send a signal to external investors that the fund manager has a high stock-picking ability,which will lead to a net inflow of funds in the delayed disclosure period.Secondly,this paper examines fund gambling trading behavior.The findings show that under the fund industry championship incentive model,funds with poor interim performance and low performance rankings have significantly higher asset return skewness in the second half of the year,and this increase in asset return skewness comes from the fact that funds hold more "lottery-type" equity assets with high return skewness in the second half of the year,which suggests that This suggests that funds are indeed showing a preference for gamble trading,driven by performance pressures.In terms of the performance impact of fund gambling,there is a significant "negative yield" curse effect of this gambling strategy of selecting more high yield skewed stocks,which will significantly reduce fund performance in the next three months,the next year and the next two years,but this negative performance impact is relatively lower than the performance impact of fund window-dressing behavior.But this negative performance impact is relatively lower than the performance impact of fund window-dressing behavior.The reason why funds still show a preference for gambling-style trading under the curse of negative returns mainly stems from the pressure of prior period performance.Fund managers will disregard the interests of the fund in order to alleviate the performance pressure,and fund gambling trading more often belongs to a kind of short-sighted self-interested behavior of fund managers based on individual professional pressure and the need for performance manipulation.Next,this paper analyzes funds’ strategic preferences and their behavioral characteristics between two opportunistic strategies,window-dressing behavior and gambling-style trading,under an opportunistic strategy interaction perspective.First,this paper considers the abnormal volatility of asset returns of fund’s quarter-end and year-end positions as a typical symptom of fund’s implementation of opportunistic behaviors,and tests the relationship between performance pressure and fund’s gambling-style trading and window-dressing behaviors by constructing a tki index that measures fund’s performance pressure using bivariate grouping,the Fama-Macbeth methodology,and the methodology of Hou and Loh(2016),and at the same time,this paper fully integrates the intrinsic characteristics of fund’s opportunistic irrational strategies and considers gambling-style preference and window-dressing preference as two typical types of opportunistic preferences,and then discusses the mechanism of heterogeneous impact of different preference strategies on fund’s end-of-quarter positions in assets and the characteristics of interaction.The empirical tests find that the emergence of fund opportunistic behavior is indeed significantly associated with the fund performance pressure index,and in the bivariate group ordering test,the abnormal volatility characteristics of the return on fund’s end-of-quarter position assets are no longer significant after controlling for fund performance pressure by grouping within a group,while the tests based on the Fama-Macbeth methodology as well as the Hou and Loh(2016)methodology reconfirm that after the introduction of the fund performance pressure index,funds do not have a tendency to concentrate on buying and selling high-quality assets and holding "lottery"stocks at the end of the quarter,and that funds’ window-dressing and gambling trades can be effectively controlled.Furthermore,an analysis of the interaction between funds’ gambling and window-dressing behavior reveals that funds have both window-dressing and gambling strategies,but when funds engage in gambling,their motivation for window-dressing is weakened,while when funds engage in window-dressing,their need for gambling cannot be weakened,and they show following characteristics.Given the limited trading capital constraints,this suggests that funds will prioritize allocating capital to "lottery" assets,while also consciously window-dressing by holding more "good stocks".On this basis,this paper analyzes the governance effect of fund manager’s holding on window-dressing behavior and gambling-style trading,and the conclusion confirms that the inhibiting effect of fund manager’s holding on window-dressing is indeed confirmed in some fund companies,but the premise is that the fund itself has a higher stock selection ability and performance acquisition ability,while for those funds with weaker stock selection ability,it is manifested as the more the more the more the more the more the more the fund is held.In addition,when a fund prefers to adopt a long-term value investment strategy,it is indeed able to rely on its strong value management ability and robust strategy to inhibit the fund’s willingness to window-dress.At the same time,fund manager’s holding of fund can also significantly inhibit fund manager’s gambling mentality,help iron out the fluctuation of fund’s return skewness,and help fund manager to form the habit of "robust trading strategy",while the impact of manager change on fund’s tendency to gamble shows heterogeneous characteristics.More often than not,the change of managers in China is actually a passive behavior under the pressure of performance,which not only magnifies the performance pressure of new managers,but also is not conducive to the formation of healthy competition and elimination mechanism in the manager market.However,when controlling for differences in the patterns and intrinsic characteristics of fund manager turnover,the dampening effect of manager change on the opportunistic tendencies of funds is revealed.Finally,from the perspective of stock market regulators and the perspective of fund internal control,this paper puts forward relevant policy recommendations and management insights on the regulatory strategies and governance mechanisms to curb fund opportunistic behaviors.The academic contribution of this paper is reflected in the following:firstly,through the examination of the performance fluctuation and fund flow during the delayed period and disclosure period of funds’ end-of-quarter position disclosure,it identifies the"short-term signaling" effect of funds’ window-dressing behaviors on the delayed period performance,and reveals the intrinsic causes for the continuation of funds’window-dressing behaviors;Secondly,based on the perspective of strategy interaction between fund window-dressing behavior and gambling-style trading,an inclusive analysis framework between fund window-dressing behavior and gambling-style trading is established,which can clarify the inherent preference and action logic of fund opportunistic behavior in a complete strategy framework of opportunistic behavior;Thirdly,fund opportunistic behavior is regarded as a typical agent problem,and from the perspective of governance mechanism design,we analyze the inhibiting effect of specific mechanism design,such as manager change and fund manager’s holding of fund,on fund opportunistic behavior,so as to provide a complete governance strategy scheme of fund opportunistic behavior from derivation,causes to inhibiting path.