FIN-04-015

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

July 2004

Malcolm Baker, Lubomir Litov, Jessica A. Wachter and 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.

Malcolm Baker
Institution: Harvard Business School
Email: mbaker@hbs.edu


Lubomir Litov
Institution: Stern School of Business, New York University
Email: llitov@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~llitov


Jessica A. Wachter
Institution: Wharton School, University of Pennsylvania
Email: jwachter@wharton.upenn.edu


Jeffrey Wurgler
Institution: Stern School of Business, New York University
Email: jwurgler@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~jwurgler

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