Style-Space Competition and Window Dressing in Mutual Funds: Evidence from China

Using a sample of Chinese open-end equity funds and equity-oriented hybrid funds from 2005 to 2021, this paper examines the effect of style-space competition (SSC) on mutual fund window dressing (WD). We find that funds facing stronger SSC are more likely to engage in WD. Specifically, they increase holdings of recent winner stocks and reduce holdings of recent loser stocks near the end of the reporting period. This finding remains robust across a series of additional tests and endogeneity treatments. Mechanism analysis suggests that SSC facilitates WD by reducing performance-flow sensitivity and weakening fund shareholder attention. Heterogeneity analyses show that the effect of SSC on WD is stronger for funds with greater redemption pressure, higher management fees, less skilled fund managers, and lower institutional ownership.