Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades
50 Pages Posted: 27 Mar 2019 Last revised: 23 Sep 2019
Date Written: May 31, 2019
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: Suggested Citation