Active Funds and Bundled News

Active Funds and Bundled News

By Charles M. C. Lee, Christina Zhu
August 2019Working Paper No. 3708

We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination.   AMFs trade 170 percent more on earnings announcement (EA) days than on non-EA days.  Abnormal AMF participation is disproportionately higher when earnings news is bundled with management guidance about future earnings.  When the two pieces of information are directionally inconsistent, AMFs trade in the direction of guidance news rather than current earnings news.  They exhibit an ability to discern, and adapt their trading to, the bias in managerial guidance.  Further, we find that increased AMF trading during EAs reduces post-guidance price drift and leads to faster price adjustment.  Collectively, our findings suggest AMFs are relatively sophisticated processors of bundled EA news, and their trading generally improves market price discovery.

Keywords
actively managed funds, earnings announcements, information processing, price efficiency, post earnings announcement drift, Trading Volume