Institutional Industry Herding
Nicole Y. Choi
University of Wyoming - Department of Economics and Finance
Richard W. Sias
University of Arizona - Department of Finance
August 8, 2008
We examine whether institutional investors follow each other into and out of the same industries. Our empirical results reveal strong evidence of institutional industry herding. The cross-sectional correlation between the fraction of institutional traders buying an industry this quarter and the fraction buying last quarter, for example, averages 40%. Additional tests suggest institutional industry herding results from managers' decisions (rather than underlying investors' flows), is not fully explained by institutions following each other into and out of similar size and book to market ratio stocks, drives institutional industry momentum trading, is more pronounced in smaller and more volatile industries, and may sometimes drive industry market values from fundamental values.
Number of Pages in PDF File: 53
Keywords: herding, institutional investors
JEL Classification: G10, G12, G14
Date posted: March 24, 2008 ; Last revised: August 13, 2008
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