Riding the Post Earnings Announcement Drift: Evidence from Mutual Funds

摘要

This paper uses portfolio holdings and returns of mutual funds to study whether investors can profitably trade on the post earnings announcement drift (PEAD). We find that actively-managed US equity mutual funds on average trade on PEAD, even after controlling for different investment styles and momentum trading. Further, trading on PEAD is profitable: net of both transaction costs and fund expenses, the annual Carhart (1997) four-factor alpha of the top 10% of funds most actively following the PEAD strategy is 2.10% higher than that of a group of benchmark funds not actively using the strategy. However, across funds, more active trading on PEAD is associated with less portfolio diversification, higher volatility in fund returns and higher volatility in fund flows, representing adverse consequences of arbitrage risk. Finally, we document the temporal dynamics between fund trading and the profitability of the PEAD strategy: higher profitability attracts more intense trading by funds, which, in turn, leads to lower future profitability.