Do Mutual Funds Trade on Earnings News? The Information Content of Large Active Trades
51 Pages Posted: 27 Mar 2019
Date Written: February 18, 2019
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: Suggested Citation