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Delegated trading and the speed of adjustment in security prices

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

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.

Suggested Citation

  • Edelen, Roger M. & Kadlec, Gregory B., 2012. "Delegated trading and the speed of adjustment in security prices," Journal of Financial Economics, Elsevier, vol. 103(2), pages 294-307.
    • Handle: RePEc:eee:jfinec:v:103:y:2012:i:2:p:294-307
    DOI: 10.1016/j.jfineco.2010.11.008
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    Cited by:

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    More about this item

    Keywords

    Trading; Agency conflict; Institutional investing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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