Inferring Mutual Fund Intra-Quarter Trading - An Application to ESG Window Dressing

We develop a novel method to infer intra-quarter trading of individual mutual funds. After a mutual fund executes a trade, its reported portfolio return deviates incrementally from its quarter-end-holdings-based return, which enables us to infer the transaction date and amount using publicly available data. We apply our method to analyze mutual funds’ strategic trading of ESG stocks. In the post-2015 period, mutual funds consistently buy (sell) high-(low-) ESG stocks before quarter ends and reverse their trades shortly after. This trading pattern is particularly pronounced among mutual funds near the cutoffs of extreme ESG rating categories. These trades also affect the returns of ESG stocks around quarter ends.

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