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)
November 13, 2007
We consider measures of stock-picking skill of mutual fund managers based on the earnings announcement returns of the stocks that they hold and trade. Relative to standard approaches, this approach focuses on an especially informative subset of the returns data, potentially increasing power to detect skilled trading, and also sheds light on the sources of skilled trading. We find that the average fund's recent buys significantly outperform its recent sells around subsequent earnings announcements. We find that mutual fund trades also forecast EPS surprises. The point estimates suggest that skilled trading around earnings announcements, deriving from an ability to forecast economic fundamentals, represents a disproportionate fraction of the total abnormal returns to skilled trading by mutual funds estimated in prior work.
Number of Pages in PDF File: 29
Keywords: Mutual fund, performance evaluation
JEL Classification: G2, G12, G14working papers series
Date posted: March 3, 2005 ; Last revised: December 13, 2011
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