Finance Papers

Document Type

Journal Article

Date of this Version

2010

Publication Source

Journal of Financial and Quantitative Analysis

Volume

45

Issue

5

Start Page

1111

Last Page

1131

DOI

10.1017/S0022109010000426

Abstract

Recent research finds that the stocks that mutual fund managers buy outperform the stocks that they sell (e.g., Chen, Jegadeesh, and Wermers (2000)). We study the nature of this stock-picking ability. We construct measures of trading skill based on how the stocks held and traded by fund managers perform at subsequent corporate earnings announcements. This approach increases the power to detect skilled trading and sheds light on its source. We find that the average fund’s recent buys significantly outperform its recent sells around the next earnings announcement, and that this accounts for a disproportionate fraction of the total abnormal returns to fund trades estimated in prior work. We find that mutual fund trades also forecast earnings surprises. We conclude that mutual fund managers are able to trade profitably in part because they are able to forecast earnings-related fundamentals.

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Date Posted: 27 November 2017

This document has been peer reviewed.