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Delegated trading and the speed of adjustment in security prices

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  • Edelen, Roger M.
  • Kadlec, Gregory B.
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    Abstract

    Institutional trading arrangements often involve the portfolio manager delegating the task of trade execution to a separate division within the firm. We model the agency conflict that arises in this setting and show that optimal performance benchmarks often create an incentive to execute orders contrary to concurrent information flow. We hypothesize that aggregate contrarian trading resulting from widespread application of such benchmarks leads to delays in the assimilation of information in security prices. Using institutional trading data, we document the hypothesized contrarian trading pattern and relate the pattern to price-adjustment delays in the response of individual stocks to index futures returns. The evidence supports the assertion that delegated institutional trading contributes to these delays.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11002182
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 103 (2012)
    Issue (Month): 2 ()
    Pages: 294-307

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    Handle: RePEc:eee:jfinec:v:103:y:2012:i:2:p:294-307

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Trading; Agency conflict; Institutional investing;

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    References

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    1. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
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    12. Hasabrouck, Joel & Sofianos, George, 1993. " The Trades of Market Makers: An Empirical Analysis of NYSE Specialists," Journal of Finance, American Finance Association, vol. 48(5), pages 1565-93, December.
    13. K. J. Martijn Cremers & Jianping Mei, 2007. "Turning over Turnover," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1749-1782, November.
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    16. Edelen, Roger M., 1999. "Investor flows and the assessed performance of open-end mutual funds," Journal of Financial Economics, Elsevier, vol. 53(3), pages 439-466, September.
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    Cited by:
    1. Aitken, Michael & Cumming, Douglas & Zhan, Feng, 2013. "High frequency trading and end-of-day price dislocation," CFS Working Paper Series 2013/16, Center for Financial Studies (CFS).

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