Cash-Flow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills

Abstract

We measure the ability of professional investment managers in timing cashflow vs. discount-rate
news, the two components of market returns. We find that the average U.S. equity mutual
fund exhibits cashflow-timing skills of 1.77%/year, but discount-rate timing of -0.87%/year;
further, cashflow-timing skills, but not discount-rate timing skills, strongly persist over future
quarters. Our evidence shows that misspecification of market-timing abilities accounts for
the failure of prior research to locate talented timing funds. Importantly, we find that value
funds outperform growth funds in timing cashflow news, which provides new evidence on the
unique skills of value-oriented mutual funds.

Keywords: Cash-flow timing, discount-rate timing, market timing

JEL Classification: G12, G23