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  • Journal of Financial and Quantitative Analysis

Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements

By: Malcolm Baker, Lubomir Litov, Jessica Wachter and Jeffrey Wurgler
  • Format:Print
  • | Pages:21
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Abstract

We consider measures of stock-picking skill of mutual fund managers based on the earnings announcement returns of the stocks that they hold and trade. Relative to standard approaches, this approach focuses on an especially informative subset of the returns data, potentially increasing power to detect skilled trading, and also sheds light on the sources of skilled trading. We find that the average fund's recent buys significantly outperform its recent sells around subsequent earnings announcements. We find that mutual fund trades also forecast EPS surprises. The point estimates suggest that skilled trading around earnings announcements, deriving from an ability to forecast economic fundamentals, represents a disproportionate fraction of the total abnormal returns to skilled trading by mutual funds estimated in prior work.

Keywords

Competency and Skills; Stocks; Investment Return; Investment Funds; Earnings Management

Citation

Baker, Malcolm, Lubomir Litov, Jessica Wachter, and Jeffrey Wurgler. "Can Mutual Fund Managers Pick Stocks? Evidence from Their Trades Prior to Earnings Announcements." Journal of Financial and Quantitative Analysis 45, no. 5 (October 2010): 1111 –1131.
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About The Author

Malcolm P. Baker

Finance
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