Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades

50 Pages Posted: 27 Mar 2019 Last revised: 10 Jun 2019

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

Wei Huang

College of Saint Benedict (CSB) and Saint John's University (SJU)

George J. Jiang

Washington State University

Date Written: May 31, 2019

Abstract

Using monthly holdings data, we show that in contrast to findings in existing literature, mutual fund trades in aggregate do not have predictive power for future earnings information. We identify active trades by mutual funds, i.e., trades not passively driven by fund flows, and show that only large active trades by mutual funds contain information on future earnings. Moreover, we show evidence that large active trades by mutual funds help incorporate future earnings information into stock prices and significantly improve stock price efficiency. Finally, we show that large active trades by mutual funds prior to earnings announcements deliver superior abnormal returns. Mutual fund managers that actively trade on future earnings news are skilled; the top quintile skilled funds on average outperform those in the bottom quintile by 127 bps in four-factor alpha over subsequent four quarters.

Keywords: Mutual fund trading, Earnings news, Large active trades, Earnings response coefficient, Stock valuation, Fund performance

JEL Classification: G23, G14, M41

Suggested Citation

Chen, Linda H. and Huang, Wei and Jiang, George, Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3337928 or http://dx.doi.org/10.2139/ssrn.3337928

Linda H. Chen

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

Wei Huang

College of Saint Benedict (CSB) and Saint John's University (SJU) ( email )

P.O. Box 2000
St. Joseph and Collegeville, MN 56321
United States

George Jiang (Contact Author)

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

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