IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/119080.html
   My bibliography  Save this paper

Institutional trade persistence and long-term equity returns

Author

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

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 multi-quarter 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.

Suggested Citation

  • Dasgupta, Amil & Prat, Andrea & Verardo, Michela, 2010. "Institutional trade persistence and long-term equity returns," LSE Research Online Documents on Economics 119080, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:119080
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/119080/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    2. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    3. Nagel, Stefan, 2005. "Short sales, institutional investors and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 277-309, November.
    4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    5. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    6. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    7. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, April.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Amil Dasgupta & Andrea Prat & Michela Verardo, 2011. "Institutional Trade Persistence and Long‐Term Equity Returns," Journal of Finance, American Finance Association, vol. 66(2), pages 635-653, April.
    3. Jiang, Hao & Verardo, Michela, 2013. "Does herding behavior reveal skill? An analysis of mutual fund performance," LSE Research Online Documents on Economics 119034, London School of Economics and Political Science, LSE Library.
    4. Kent Daniel & David Hirshleifer & Lin Sun, 2020. "Short- and Long-Horizon Behavioral Factors," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1673-1736.
    5. Chen, Tsung-Yu & Chao, Ching-Hsiang & Wu, Zhen-Xing, 2021. "Does the turnover effect matter in emerging markets? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    6. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    7. Jang, Jeewon & Kang, Jangkoo, 2019. "Probability of price crashes, rational speculative bubbles, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 132(1), pages 222-247.
    8. Keloharju, Matti & Linnainmaa, Juhani T. & Nyberg, Peter, 2021. "Are return seasonalities due to risk or mispricing?," Journal of Financial Economics, Elsevier, vol. 139(1), pages 138-161.
    9. Lin, Mei-Chen & Lin, Yu-Ling, 2021. "Idiosyncratic skewness and cross-section of stock returns: Evidence from Taiwan," International Review of Financial Analysis, Elsevier, vol. 77(C).
    10. Deniz Anginer & Çelim Yıldızhan, 2018. "Is There a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross-section of Equity Returns [The risk-adjusted cost of financial distress]," Review of Finance, European Finance Association, vol. 22(2), pages 633-660.
    11. Suresh Nallareddy & Maria Ogneva, 2017. "Accrual quality, skill, and the cross-section of mutual fund returns," Review of Accounting Studies, Springer, vol. 22(2), pages 503-542, June.
    12. Barinov, Alexander & Wu, Juan (Julie), 2014. "High short interest effect and aggregate volatility risk," Journal of Financial Markets, Elsevier, vol. 21(C), pages 98-122.
    13. Bai, Jennie & Bali, Turan G. & Wen, Quan, 2021. "Is there a risk-return tradeoff in the corporate bond market? Time-series and cross-sectional evidence," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1017-1037.
    14. Zeng, Yeqin, 2016. "Institutional investors: Arbitrageurs or rational trend chasers," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 240-262.
    15. Andrew Ang & Assaf A. Shtauber & Paul C. Tetlock, 2013. "Asset Pricing in the Dark: The Cross-Section of OTC Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 2985-3028.
    16. Cosemans, Mathijs & Frehen, Rik, 2021. "Salience theory and stock prices: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 140(2), pages 460-483.
    17. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.
    18. Jiang, Hao & Sun, Zheng, 2014. "Dispersion in beliefs among active mutual funds and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 114(2), pages 341-365.
    19. Jiang, Hao & Verardo, Michela, 2018. "Does herding behavior reveal skill? An analysis of mutual fund performance," LSE Research Online Documents on Economics 86372, London School of Economics and Political Science, LSE Library.
    20. Andreou, Panayiotis C. & Kagkadis, Anastasios & Philip, Dennis & Tuneshev, Ruslan, 2018. "Differences in options investors’ expectations and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 315-336.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:119080. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.