Active Funds and Bundled News

Abstract

ABSTRACT We use trade-level data to examine the role of actively managed funds (AMFs) in earnings news dissemination. We find that AMFs are drawn to, and participate disproportionately more in, earnings announcements (EAs) that include bundled managerial guidance. When the two pieces of news are directionally inconsistent, AMFs trade in the direction of future guidance rather than current earnings. AMFs exhibit an ability to discern, and adapt their trading to, the bias in bundled guidance. While AMF trades at EAs are generally more profitable than their non-EA trades, this result reverses when guidance bias is extreme. Overall, we find that increased AMF trading during EAs leads to faster price adjustment. Collectively, these findings suggest that AMFs are sophisticated processors of bundled earnings news, and their trading generally improves market price discovery. JEL Classifications: G12; G14; G23; M41.