Can mutual fund managers pick stocks? Evidence from their trades prior to earnings announcements

Malcolm Baker, Lubomir Litov, Jessica A. Wachter, Jeffrey Wurgler

Research output: Contribution to journalArticlepeer-review

96 Scopus citations

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 funds 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.

Original languageEnglish (US)
Pages (from-to)1111-1131
Number of pages21
JournalJournal of Financial and Quantitative Analysis
Volume45
Issue number5
DOIs
StatePublished - Oct 2010

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Can mutual fund managers pick stocks? Evidence from their trades prior to earnings announcements'. Together they form a unique fingerprint.

Cite this