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Incentives, Discretion, and Asset Valuation in Closed–End Mutual Funds

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  • Nandini Chandar
  • Robert Bricker
Abstract
This paper studies earnings management using 363 closed–end mutual fund firm–years of data. Closed–end fund assets consist of unrestricted and restricted securities, and realized and unrealized income. While unrestricted securities are not subject to earnings management, restricted security values are largely discretionary. Managerial valuation of restricted securities is modeled as contingent on unrestricted returns relative to a performance benchmark. Four unrestricted performance regions are identified. Known multi–period compensation incentives become the basis for hypothesizing earnings management behaviors in the regions in the form of restricted security valuation. Across several benchmarks, the results are consistent with multi–period maximization rather than simpler single–period compensation maximization or income smoothing. Funds with extreme unrestricted performance show relatively larger income–decreasing earnings management, and funds with slightly–below benchmark returns show relatively larger income–increasing earnings management than those slightly above. These results clarify the relationship between complex earnings management behavior and managerial incentives.

Suggested Citation

  • Nandini Chandar & Robert Bricker, 2002. "Incentives, Discretion, and Asset Valuation in Closed–End Mutual Funds," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1037-1070, September.
    • Handle: RePEc:bla:joares:v:40:y:2002:i:4:p:1037-1070
    DOI: 10.1111/1475-679X.00081
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    Cited by:

    1. Godwin, Alexander, 2022. "Hedge fund alpha and beta corrected for stale pricing," MPRA Paper 112509, University Library of Munich, Germany.
    2. Cai, Yu & Wang, Qing, 2022. "Money funds manage returns," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    3. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-330, National Bureau of Economic Research, Inc.
    4. Rodrigo Fernandes Malaquias & Dermeval Martins Borges Junior & Pablo Zambra, 2024. "Do Investment Funds Audited by the Big Four Firms Exhibit Different Performances? Evidence from Brazil," JRFM, MDPI, vol. 17(7), pages 1-11, July.
    5. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, vol. 74(3), pages 529-609, December.
    6. Vladimir Atanasov & John J. Merrick & Philipp Schuster, 2023. "Mismarking in Mutual Funds," Management Science, INFORMS, vol. 69(2), pages 1275-1300, February.
    7. Pinto, Inês, 2013. "Asset value management in the Portuguese real estate sector," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 22(2), pages 86-97.
    8. Koo, Minjae & Muslu, Volkan, 2023. "Fund Flows and Asset Valuations of Bond Mutual Funds: Effect of Side-by-Side Management," Journal of Banking & Finance, Elsevier, vol. 154(C).
    9. Huyen Nguyen-Thi-Thanh & Georges Gallais-Hamonno & Thi H.V. Hoang, 2008. "Faut-il corriger les rentabilités des hedge funds?," Post-Print halshs-00106400, HAL.
    10. Agarwal, Vikas & Daniel, Naveen D. & Naik, Narayan Y., 2009. "Do hedge funds manage their reported returns?," CFR Working Papers 07-09, University of Cologne, Centre for Financial Research (CFR).

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