Mutual Fund Response to Earnings News: Evidence from Trade-Level Data

We use trade-level data to examine the role of mutual funds (MFs) in earnings news dissemination. MFs trade (172%) more on earnings announcement (EA) days than on non-EA days. The EA trades made by MFs are reliably more profitable than their non-EA trades. At the fund level, MFs with higher trading intensity during EAs are also more profitable than MFs with lower trading intensity during EAs. Furthermore, we find increased MF trading during EA reduces post earnings announcement drift (PEAD) and leads to faster price adjustment, measured in various ways. Moreover, the directional trades of MFs generally shift returns from the post-EA period to the EA period. Collectively, our evidence suggests that MFs are relatively sophisticated processors of earnings news, and that their trading during EAs improves the price discovery process.