Mutual Fund Competition and Profiting from the Post Earnings Announcement Drift

Abstract:     
We examine how competition affects the performance of active equity mutual funds aggressively pursuing the post earnings announcement drift (PEAD). We find that competition significantly erodes the performance of these funds. Amid increased competition, there is also increased diversity in the sophistication of implementing the strategy by funds. A group of funds aggressively pursuing the strategy successfully avoid competition and generate superior performance. The identities of these low-competition funds are persistent. Moreover, these funds tend to hold and trade on stocks with high trading costs and high idiosyncratic volatility, presumably to avoid crowding. Our findings suggest that for these low-competition funds, the benefit of avoiding competition outweighs the downside of incurring high trading costs.

Number of Pages in PDF File: 47

working papers series