TY  - JOUR
AU  - Da,Zhi
AU  - Gao,Pengjie
AU  - Jagannathan,Ravi
TI  - When Does a Mutual Fund's Trade Reveal its Skill?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13625
PY  - 2007
Y2  - November 2007
UR  - http://www.nber.org/papers/w13625
L1  - http://www.nber.org/papers/w13625.pdf
N1  - Author contact info:
Zhi Da
University of Notre Dame
239 Mendoza College of Business
Notre Dame, Indiana 46556-5646
Tel: 574-631-0354
E-Mail: zda@nd.edu

Pengjie Gao
Department of Finance
Mendoza College of Business
University of Notre Dame
Notre Dame, Indiana 46556-5646
E-Mail: pgao@nd.edu

Ravi Jagannathan
Kellogg Graduate School of Management
Northwestern University
2001 Sheridan Road
Leverone/Anderson Complex
Evanston, IL 60208-2001
Tel: 847/491-8338
Fax: 847/491-5719
E-Mail: rjaganna@northwestern.edu
AB  - We conjecture that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information-events. Taking the probability of informed trading (PIN, Easley, Kiefer, O'Hara, and Paperman, 1996) to measure the amount of informed trading in a stock, and inferring mutual fund trades from a large sample of mutual fund holdings, we provide empirical support for the conjecture. Funds trading high-PIN stocks exhibit superior performance on average, and superior performance that is more likely to persist. The findings are not due to price momentum or the higher returns earned by high-PIN stocks on average. Conclusions remain the same after testing for alternative measures for the amount of informed trading. Decomposing a fund's stock selection ability into "informed trading" and "liquidity provision" adds further insight into fund's underlying strengths. Impatient informed trading is a significant source of alpha for funds trading high-PIN stocks, while liquidity provision is more important as a source of alpha for funds trading low-PIN stocks.
ER  -