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Cashflow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills

Author

Listed:
  • Chunhua Lan

    (Faculty of Management, University of New Brunswick, Fredericton, New Brunswick E3B 5A3, Canada)

  • Russ Wermers

    (Smith School of Business, University of Maryland at College Park, College Park, Maryland 20742)

Abstract

We measure the ability of professional investment managers in timing cashflow versus discount-rate news, the two components of market returns. We find that the average U.S. equity mutual fund exhibits cashflow-timing skills of 1.77%/year, but discount-rate timing of −0.87%/year; furthermore, cashflow-timing skills, but not discount-rate timing skills, strongly persist over future quarters. Our evidence indicates that misspecification of market-timing abilities accounts for the failure of prior research to locate talented timing funds. Importantly, we find that value funds outperform growth funds in timing cashflow news, which provides new evidence on the unique skills of value-oriented mutual funds.

Suggested Citation

  • Chunhua Lan & Russ Wermers, 2024. "Cashflow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills," Management Science, INFORMS, vol. 70(2), pages 694-713, February.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:2:p:694-713
    DOI: 10.1287/mnsc.2023.4693
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