Do Corporate Bond Mutual Funds Exhibit Investment Skill? Evidence from Earnings Announcements

Abstract

Using monthly holdings data, we examine whether corporate bond mutual funds trade in anticipation of earnings announcements. We find that high-yield (HY) bond funds systematically reduce their exposure to HY bonds ahead of negative earnings surprises. These anticipatory trades predict both subsequent monthly bond returns and short-window announcement returns. At the fund level, HY funds whose trading is more predictive of negative earnings surprises deliver significantly higher after-fee abnormal returns. Further analysis indicates that this behavior is consistent with firm-specific information that accumulates prior to announcements, suggestive of a credit-specific informational advantage rather than information spillovers from affiliated equity funds. Overall, our findings identify a novel micro-level mechanism that helps explain HY funds’ macro-level predictive power and highlight the potential value of active management in bond markets.

Keywords: High-Yield Bonds, Corporate Bond Funds, Earnings Announcements, Anticipatory Trading, Managerial Skill, High-Yield Bond Returns, Informational Advantage, Credit Analysis

JEL Classification: G14