Origins of Mutual Fund Skill: Market versus Accounting Based Asset Pricing Anomalies
65 Pages Posted: 24 Jan 2021 Last revised: 26 May 2023
Date Written: March 29, 2023
Abstract
This paper decomposes the active U.S. equity mutual funds' value added using 234 public asset pricing anomalies. We find that mutual funds on average lose substantial value through their high exposure to the short legs of accounting anomalies (e.g., investment, profitability, and accrual). This high exposure is largely due to the high correlation between the short legs of accounting anomalies and the long legs of anomalies based on market information (e.g., momentum, liquidity risk, and seasonality). Mutual funds fail in keeping a low exposure to the short legs of accounting anomalies while profiting from a high exposure to the long legs of anomalies based on market information. Further evidence suggests that the negative exposure to accounting anomalies is neither due to fund flows nor career concerns of fund managers.
Keywords: Mutual funds; Anomalies; Value added; Public information; Investment decisions
JEL Classification: G11; G14; G23
Suggested Citation: Suggested Citation