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Institutional Trade Persistence and Long-Term Equity Returns

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  • Dasgupta, Amil
  • Prat, Andrea
  • Verardo, Michela

Abstract

How does the trading behaviour of institutional money managers affect stock prices? In this paper we document a robust relationship between the net trade patterns of institutional money managers and long term equity returns. Examining quarterly data on US institutional holdings from 1983 to 2004, we find evidence that stocks that have been persistently bought (sold) by institutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our results are of a similar magnitude to, but distinct from, other known asset pricing anomalies. Furthermore, we find that institutional investors show an aggregate tendency to trade in the direction of past institutional trades, buying stocks that have been persistently bought and selling stocks that have been persistently sold. We present a simple model of career-concerned trading by delegated portfolio managers that generates results consistent with our empirical findings.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6374.

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Date of creation: Jul 2007
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Handle: RePEc:cpr:ceprdp:6374

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Keywords: career concerns; institutional investors; return predictability; trading behaviour;

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Citations

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Cited by:
  1. Cao, Charles & Liang, Bing & Lo, Andrew W. & Petrasek, Lubomir, 2014. "Hedge fund holdings and stock market efficiency," Finance and Economics Discussion Series 2014-36, Board of Governors of the Federal Reserve System (U.S.).
  2. Menkhoff, Lukas & Schmeling, Maik & Schmidt, Ulrich, 2008. "Are all professional investors sophisticated?," Hannover Economic Papers (HEP) dp-397, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Changki Kim & Yangho Choi & Woojoo Lee & Jae Youn Ahn, 2013. "Analyzing Herd Behavior in Global Stock Markets: An Intercontinental Comparison," Papers 1308.3966, arXiv.org.
  4. Brounen, Dirk & Kok, Nils & Ling, David C., 2012. "Shareholder composition, share turnover, and returns in volatile markets: The case of international REITs," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1867-1889.
  5. Choi, Nicole & Sias, Richard W., 2009. "Institutional industry herding," Journal of Financial Economics, Elsevier, vol. 94(3), pages 469-491, December.
  6. Jiang, Hao, 2010. "Institutional investors, intangible information, and the book-to-market effect," Journal of Financial Economics, Elsevier, vol. 96(1), pages 98-126, April.
  7. Fang Cai & Song Han & Dan Li, 2012. "Institutional herding in the corporate bond market," International Finance Discussion Papers 1071, Board of Governors of the Federal Reserve System (U.S.).

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