Identifying Skilled Mutual Fund Managers by their Ability to Forecast Earnings

We propose a new measure, the Ability to Forecast Earnings (AFE), to identify skilled fund managers. AFE focuses on stock performance during a short window around earnings announcements, in which price movements are predominantly due to firmspecific information revealing fundamental values. It is thus less affected by noise and other shocks in the market. Over the period 1984–2008, we find strong persistence in AFE for skilled funds in the subsequent three years. Moreover, funds in the top decile with the highest AFE subsequently outperform those with the lowest AFE by 2 to 3 percent per year.  Hao Jiang is from Michigan State University. Tel: (517) 353-2920. E-mail: [email protected]. Lu Zheng is at Paul Merage School of Business, University of California–Irvine and China Academy of Financial Research (CAFR). Tel: (949) 824-8365. Email: [email protected]. We thank Massimo Massa, Pedro Matos, participants at the Hong Kong University of Science and Technology Finance Symposium, 2013 China International Conference in Finance, Chinese University of Hong Kong, and Shanghai Advanced Institute of Finance.