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Institutional Herding and Future Stock Returns

Roberto C. Gutierrez Jr.
University of Oregon

Eric Kelley
University of Arizona


December 16, 2009


Abstract:     
When the trading of institutional investors is imbalanced between buys and sells, how are stock prices affected? The extant literature on such herding by institutions concludes that herding promotes price discovery. That is, herding correctly predicts stock returns in the near term. Examining a longer window, we find that herding is negatively related to returns in the second year after the herding. This longer run reversal in returns dominates any shorter run return continuation and suggests that herding pushes prices beyond their intrinsic levels. In addition, consistent with a price pressure interpretation of the longer run reversal, we detect an asymmetry in the relations between buy and sell herding and longer run reversal that mirrors the well-documented buy/sell asymmetry found in the high-frequency studies of institutional trades. Buy herds during up markets push prices too high; sell herds during down markets push prices too low.

Keywords: institutional investors, herding, stock returns

JEL Classifications: G14, G12, G20

Working Paper Series

Date posted: March 24, 2008 ; Last revised: December 17, 2009

Suggested Citation

Gutierrez , Roberto C. and Kelley, Eric, Institutional Herding and Future Stock Returns (December 16, 2009). Available at SSRN: http://ssrn.com/abstract=1107523


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Contact Information

Roberto C. Gutierrez Jr. (Contact Author)
University of Oregon ( email )
Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3254 (Phone)
541-346-3341 (Fax)
Eric Kelley
University of Arizona ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-5589 (Phone)
Feedback to SSRN (Beta)


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