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Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings AnnouncementsMalcolm P. BakerHarvard Business School; National Bureau of Economic Research (NBER) Lubomir P. LitovUniversity of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center Jessica A. WachterUniversity of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER) Jeffrey WurglerNYU Stern School of Business; National Bureau of Economic Research (NBER) July 2004 NYU Working Paper No. FIN-04-015 Abstract: We test whether fund managers have stock-picking skill by comparing their holdings and trades prior to earnings announcements with the returns realized at those events. This approach largely avoids the joint-hypothesis problem with long-horizon studies of fund performance. Consistent with skilled trading, we find that, on average, stocks that funds buy earn significantly higher returns at subsequent earnings announcements than stocks that they sell. Funds display persistence in our event return-based metrics, and those that do well tend to have a growth objective, large size, high turnover, and use incentive fees to motivate managers.
Number of Pages in PDF File: 31 working papers seriesDate posted: November 3, 2008Suggested CitationContact Information
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