Window Dressing, Fund Performance, and Fund Flows: Insights into Taiwan's Equity Mutual Funds*

Abstract This research examines the relationships among window dressing, fund performance, and fund flows in Taiwan's equity fund industry. The empirical findings reveal several important insights. Equity fund managers are actively involved in window dressing, with underperforming managers being more prone to such practices. These managers demonstrate a stronger preference for increasing their holdings of winner stocks more than avoiding loser stocks. Additionally, funds with a higher portfolio concentration and turnover rates are more likely to engage in window dressing activities compared to other funds. The study also highlights the adverse effects of window dressing on performance and fund flows. Window dressing negatively impacts both short‐ and long‐term fund performances. Furthermore, window dressing fails to attract short‐term fund inflows and instead exacerbates the decline in long‐term outflows. This comprehensive analysis highlights the implications of window dressing on fund performance and investor behavior, shedding light on its prevalence and consequences within Taiwan's equity fund industry.