Money Managers' Responses to Strings of Consecutive Earnings Increases

39 Pages Posted: 14 Oct 2002

See all articles by Bin Ke

Bin Ke

National University of Singapore

Kathy R. Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management

Date Written: June 2002

Abstract

We test whether money managers (i.e., mutual funds and independent investment advisors) prefer investing in stocks that report long strings of consecutive earnings increases. We find that money managers purchase more shares in firms with a long string of consecutive earnings increases relative to firms with a short string of consecutive earnings increases, after controlling for common determinants of their trading decisions. In addition, we find that money managers do not decrease their holdings in firms with a long string of consecutive earnings increases until the quarter immediately preceding the announcement of the break. Importantly, most of the selling in the quarter prior to the break appears to be driven by management's preemptive voluntary disclosures of the break. The money managers' trading strategy does not appear to be rational because the length of a string of consecutive earnings increases is not associated with future positive abnormal returns and money managers trade in the opposite directions of corporate insiders over the earnings string. The observed money managers' trading strategy appears to be consistent with the trading behavior predicted by the representativeness heuristic documented in the psychology literature.

JEL Classification: M41, G23, G29

Suggested Citation

Ke, Bin and Petroni, Kathy Ruby, Money Managers' Responses to Strings of Consecutive Earnings Increases (June 2002). Available at SSRN: https://ssrn.com/abstract=324921 or http://dx.doi.org/10.2139/ssrn.324921

Bin Ke

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-53
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Kathy Ruby Petroni (Contact Author)

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

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