Actively Managed Funds and Earnings News: Evidence from Trade-Level Data

Abstract

We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination. AMFs trade (172 percent) more on earnings announcement (EA) days than on non-EA days. The EA buys made by AMFs are reliably more profitable than their non-EA buys. At the fund level, AMFs with higher trading intensity during EAs are also more profitable than AMFs with lower trading intensity during EAs. Furthermore, we find that increased AMF trading during EAs reduces post earnings announcement drift (PEAD) and leads to faster price adjustment, measured in various ways. Moreover, the directional trades of AMFs generally shift returns from the post-EA period to the EA period. Collectively, our evidence suggests that AMFs are relatively sophisticated processors of earnings news and that their trading during EAs improves the price discovery process.

Keywords: actively managed funds, earnings announcements, information processing, price efficiency, post earnings announcement drift, trading volume

JEL Classification: G12, G14, G23, M41