TY  - JOUR
AU  - Da,Zhi
AU  - Gao,Pengjie
AU  - Jagannathan,Ravi
TI  - Informed Trading, Liquidity Provision, and Stock Selection by Mutual Funds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14609
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14609
L1  - http://www.nber.org/papers/w14609.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 show that a mutual fund's "stock selection skill" computed using the Daniel, Grinblatt, Titman and Wermers (1997) procedure can be decomposed into additional components that include impatient "informed trading" and "liquidity provision," thereby helping us understand how a fund creates value. We validate our method by verifying that liquidity provision is the dominant component of selection skill for Dimensional Fund Advisors U.S. Micro Cap fund, as observed by Keim (1999). Index funds lose on liquidity absorbing trades, since they pay the price impact on trades triggered by index rebalancing, inflows and redemptions. Consistent with the view that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information events, we find that funds trading such stocks exhibit superior performance that is more likely to persist. Further, such superior performance comes mostly from impatient informed trading. We also find that informed trading is more important for growth-oriented funds while liquidity provision is more important for younger funds with income orientation.
ER  -