Trading on Short-Term Information

This paper shows that investors may want fund managers to acquire and trade on short-term instead of more profitable long-term information. This improves learning about managerial ability from performance observations, for two reasons. Firstly, short-term information is of higher quality, which allows the investor to draw sharper inferences over a manager's type. Secondly, performance observations under long-term informed trade are contaminated by noise contained in prices, which further weakens inference. The paper thus explicitly links the degree of short-term information dissemination to the profitability and the learning implications of short-term versus long-term informed trading.