Stocks as Lotteries: Evidence from Corporate Earnings Announcements

AbstractRecent research finds that the stocks that mutual fund managers buy outperform the stocks that they sell (e.g., Chen, Jegadeesh, and Wermers (2000)). We study the nature of this stock-picking ability. We construct measures of trading skill based on how the stocks held and traded by fund managers perform at subsequent corporate earnings announcements. This approach increases the power to detect skilled trading and sheds light on its source. We find that the average fund’s recent buys significantly outperform its recent sells around the next earnings announcement, and that this accounts for a disproportionate fraction of the total abnormal returns to fund trades estimated in prior work. We find that mutual fund trades also forecast earnings surprises. We conclude that mutual fund managers are able to trade profitably in part because they are able to forecast earnings-related fundamentals.

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Small consequences of a major agreement: the MILA case

Academia Revista Latinoamericana de Administración ◽

10.1108/arla-12-2017-0357 ◽

2018 ◽

Vol 31 (3) ◽

pp. 486-518 ◽

Cited By ~ 2

Author(s):

Nicolas Hardy ◽

Nicolas S. Magner ◽

Jaime Lavin ◽

Rodrigo A. Cardenas ◽

Mauricio Jara-Bertin

Keyword(s):

Stock Market ◽

Market Efficiency ◽

Latin American ◽

Earnings Announcements ◽

Market Model ◽

Conditional Heteroscedasticity ◽

Content Type ◽

Corporate Earnings ◽

Autoregressive Conditional Heteroscedasticity ◽

Practical Implications

Purpose The purpose of this paper is to provide evidence about the effects of the MILA agreement in terms of improving financial market efficiency. Design/methodology/approach The authors measure efficiency by studying the stock reaction to earnings announcements using a conditional heteroscedasticity generalized autoregressive conditional heteroscedasticity-adjusted market model and the most commonly implemented event study tests for 3,399 events across four countries in the Latin American Integrated Market (MILA). Findings Contrary to expectations, the results show that the MILA agreement has isolated gains in terms of reaction to corporate earnings announcements, which translates into partial improvements in market efficiency. However, the evidence indicates that the MILA agreement favored cointegration, which is in line with other studies. Practical implications This paper provides evidence for policymakers and regulators that a stock market agreement is a condition that promotes market cointegration, but it is not an element that in itself ensures an improvement in market efficiency. To achieve greater MILA benefits, regulatory and market-level changes are required. Originality/value This is the first study that analyses the effect of a stock market agreement on the efficiency of markets, expanding on what has been studied in the finance literature regarding the influence of these agreements on cointegration.

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