Can Mutual Funds Profit from Post Earnings Announcement Drift? The Role of Competition
61 Pages Posted: 14 Mar 2012 Last revised: 8 Mar 2020
Date Written: October 25, 2016
This study examines how competition affects the profitability of mutual funds’ trading on the post earnings announcement drift (PEAD). Our results show that while the average fund actively pursuing this strategy does not generate significant outperformance, funds that manage to avoid competition do deliver superior performance. Further, funds stay away from crowded trades by investing in illiquid stocks. Our evidence suggests that when there is a lack of competition, trading costs do not completely wipe out the profitability of trading on an anomaly.
Keywords: mutual funds, competition, post earnings announcement drift, anomaly
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