Mutual Fund Competition and Profiting from the Post Earnings Announcement Drift

Abstract

We examine how competition affects the performance of mutual funds trading on the post earnings announcement drift (PEAD) strategy. Mutual funds aggressively pursuing this strategy on average do not generate significant outperformance. However, some of them manage to encounter low competition and deliver superior performance. These funds tend to hold and trade on stocks with low liquidity and high volatility. Our findings suggest that some funds have skills to profitably implement the PEAD strategy while avoid crowded trades, and that for these low-competition funds, the benefit of reduced competition outweighs the potential costs of trading on illiquid and volatile stocks.