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

51 Pages Posted: 27 Mar 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: February 18, 2019

Abstract

Using monthly holdings data, we show that while mutual funds generally trade in the direction of earnings surprises, mutual fund trades in aggregate do not have predictive power for future earnings once we control for past firm performance and stock returns. We identify active trades by mutual funds, i.e., trades not passively driven by fund flows, and find that large active trades by mutual funds contain information on future earnings. Moreover, we show that large active mutual fund trades not only significantly increase market responses to earnings announcements but also help incorporate future earnings information into current stock prices. Furthermore, we show that large active mutual fund trades prior to earnings announcements have superior abnormal returns. Finally, we show evidence that 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 the 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 (February 18, 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

Register to save articles to
your library

Register

Paper statistics

Downloads
410
rank
68,916
Abstract Views
1,537
PlumX Metrics