Active Funds and Bundled News

55 Pages Posted: 27 Jul 2018 Last revised: 28 Aug 2019

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: August 27, 2019

Abstract

We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination. AMFs trade 170 percent more on earnings announcement (EA) days than on non-EA days. Abnormal AMF participation is disproportionately higher when earnings news is bundled with management guidance about future earnings. When the two pieces of information are directionally inconsistent, AMFs trade in the direction of guidance news rather than current earnings news. They exhibit an ability to discern, and adapt their trading to, the bias in managerial guidance. Further, we find that increased AMF trading during EAs reduces post-guidance price drift and leads to faster price adjustment. Collectively, our findings suggest AMFs are relatively sophisticated processors of bundled EA news, and their trading generally improves market price discovery.

Keywords: actively managed funds, earnings announcements, management forecasts, information processing, price efficiency, trading volume

JEL Classification: G12, G14, G23, M41

Suggested Citation

Lee, Charles M.C. and Zhu, Christina, Active Funds and Bundled News (August 27, 2019). Stanford University Graduate School of Business Research Paper No. 18-35; 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=3209449 or http://dx.doi.org/10.2139/ssrn.3209449

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Christina Zhu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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