Fund Manager Use of Public Information: New Evidence on Managerial Skills
58 Pages Posted: 13 Dec 2004
We propose a simple model that relates skills of a fund manager to his reliance on public information -- the main implication being that the sensitivity of a manager's holdings to changes in public information decreases in his skill level. We estimate this sensitivity (RPI) as the R^2 of the regression of changes in a manager's portfolio holdings on changes in analysts' past recommendations using a large panel of U.S. equity funds for the period 1993 to 2002. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance. These findings strengthen the interpretation of traditional performance measures as indeed reflecting skills in that managers who produce high values of these measures also have low RPI. Besides, we find that RPI contains information on managerial skills that may not be precisely reflected in traditional performance measures since flows from outside investors chase low-RPI funds, controlling for past fund performance. Our results are robust to different macro-economic variables, various information sets, information spillovers among stocks in the fund's portfolio, fund style, fund size, and fund turnover. In contrast to existing studies, we also document a significant role of manager-specific attributes in explaining performance.
Keywords: Managerial skill, public information, mutual funds, stock analysts
JEL Classification: G14, G23
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