Working Paper: NBER ID: w10685
Authors: Malcolm Baker; Lubomir Litov; Jessica Wachter; Jeffrey Wurgler
Abstract: We test whether fund managers have stock-picking skill by comparing their holdings and trades prior to earnings announcements with the returns realized at those events. This approach largely avoids the joint-hypothesis problem with long-horizon studies of fund performance. Consistent with skilled trading, we find that, on average, stocks that funds buy earn significantly higher returns at subsequent earnings announcements than stocks that they sell. Funds display persistence in our event return-based metrics, and those that do well tend to have a growth objective, large size, high turnover, and use incentive fees to motivate managers.
Keywords: mutual funds; stock picking; earnings announcements
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mutual funds buy stocks (G23) | Higher returns at subsequent earnings announcements (G14) |
| Mutual funds sell stocks (G23) | Lower returns at subsequent earnings announcements (G14) |
| Fund characteristics (growth objective, large size, high turnover) (L25) | Higher performance metrics (C52) |
| Weight-increasing stocks (G12) | Higher subsequent earnings announcement returns (G14) |
| Weight-decreasing stocks (G12) | Lower subsequent earnings announcement returns (G14) |