This study examines how competition affects the profitability of mutual funds’ trading on the post earnings announcement drift (PEAD). Our results show that among funds actively pursuing this strategy, only those that manage to avoid competition deliver superior performance. Further, we find that funds avoid competition by investing in illiquid stocks. Our analysis shows that the outperformance of these low-competition funds is mainly attributable to their information advantage in identifying mispricing among illiquid stocks.

There is a long-standing debate on whether sell-side analysts learn from their experience to improve earnings forecast skills. This study shows that incentive is an important factor for understanding the “learning by doing” effect by analysts. We examine analysts’ response to a complex type of information – corporate pension underfunding. Pension underfunding negatively impacts future earnings and analysts on average underreact to such information in their earnings forecasts. More importantly, when there is a strong incentive for analysts to deliver accurate forecasts, analyst learning effectively reduces their underreaction to pension underfunding information. On the other hand, when such an incentive is absent, the analyst learning effect is not discernible in the data. Further evidence suggests that analyst learning and incentive jointly reduce stock market mispricing associated with corporate pension underfunding.