We study the effect of increased portfolio transparency on mutual funds’ portfolio manipulation activities and investors’ capital allocation efficiency. Investigating the 2004 regulation change to increase the frequency of mutual fund portfolio disclosure in a difference-in-differences framework, we find that investment efficiency as measured by the return predictability of money flows has improved after the rule change. However, there is little evidence that portfolio manipulation practices — portfolio overlap, portfolio pumping, style drift, and window dressing — have declined after 2004. We conclude that a disclosure policy aiming to increase transparency about portfolio holdings enhances the information environment in the mutual fund market and enables investors to make more informed asset allocation decisions, but it is not sufficient to discourage fund managers from engaging in opportunistic behavior.​

Keywords: Mutual funds; portfolio holdings; disclosure; portfolio manipulation; capital allocation efficiency.
JEL Codes: G11, G18, G23, M41​