Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements
Malcolm P. Baker
Harvard Business School; National Bureau of Economic Research (NBER)
Lubomir P. Litov
University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center
Jessica A. Wachter
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
NYU Stern School of Business; National Bureau of Economic Research (NBER)
NYU Working Paper No. FIN-04-015
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: 31working papers series
Date posted: November 3, 2008
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