"Information Content when Mutual Funds Deviate from Benchmarks"



To assess whether actively managed mutual funds attain informational advantages in stock markets, this paper creates a stock-level measure that seeks to aggregate various pieces of information scattered among fund managers, as revealed through their over- and underweighting decisions. This measure of mutual funds' deviations from benchmarks strongly and positively predicts future returns. The return premium on stocks heavily overweighted by mutual funds, relative to their underweighted counterparts, reaches 0.74% per month; it is stronger among smaller firms with more firm-specific information and more pronounced for smaller and more active mutual funds. A significant portion of this premium occurs around corporate earnings announcements. These results point to an informational link between mutual fund investing and asset prices.
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Sebastian Gryglewicz
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