Missing the Marks? Dispersion in Corporate Bond Valuations Across Mutual Funds

We study the dispersion of month-end valuations placed on identical corporatebonds by different mutual funds. Such dispersion is related to bond-specificcharacteristics associated with liquidity and market volatility. TRACE may havecontributed to the general decline in dispersion over our sample period, though otherfactors most likely played roles. Further tests reveal marking patterns to be consistentwith returns smoothing behavior by managers. Funds with ambiguous marking policiesand those holding “hard-to-mark” bonds appear more prone to smooth reported returns.From a regulatory perspective, we see little downside to requiring funds to explicitly statetheir marking standards.