Reconcilable Differences: Momentum Trading by Institutions

Abstract

A number of recent studies test whether institutional investors, as a group, engage in momentum trading. Given directly observable returns and changes in institutional ownership, it is surprising that these studies reach vastly different conclusions. I re-examine the relation between changes in ownership structure and lag returns and, contrary to most recent studies, find strong evidence of institutional momentum trading. Moreover, I demonstrate that differences from previous studies arise from a number of factors including: (1) value-weighting versus equal-weighting across securities, (2) averaging versus aggregating over managers, (3) disagreement in the signs of measures of institutional demand (e.g., an institution buying a security while decreasing the security's portfolio weight), and (4) correlation between current capitalization and both lag returns and the absolute value of measures of institutional demand. Once controlling for these factors, the results across different methods are remarkably uniform - institutional demand is strongly related to cross-sectional variation in lag returns.