We find evidence that hedge funds significantly manipulate stock prices on critical reporting dates. We document that stocks held by hedge funds experience higher returns on the last day of the quarter, followed by a reversal the next day. For example, the stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 30 basis points on the last day of the quarter and a reversal of 25 basis points on the following day. Using intraday data, we show that a significant part of the return is earned during the last minutes of the last day of the quarter, at an increasing rate towards the closing bell. This evidence is consistent with hedge funds ’ incentives to inflate their monthly performance by buying the stocks they hold in their portfolios. Evidence of manipulation is stronger for funds that have higher incentives for improving their ranking relative to their peers and a lower cost of doing so. Such dislocations of market prices constitute a negative externality for agents using end-of-month market prices for benchmarking, contracting, or trading purposes.
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Ben‐David et al. (2011) studied this question.