Institutional Trade Persistence and Long-Term Equity Returns

Institutional Trade Persistence and Long-Term Equity Returns

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Article ID: iaor201112041
Volume: 66
Issue: 2
Start Page Number: 635
End Page Number: 653
Publication Date: Apr 2011
Journal: The Journal of Finance
Authors: , ,
Keywords: stock market
Abstract:

Recent studies show that single‐quarter institutional herding positively predicts short‐term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multiquarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long‐term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.

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