Institutional Industry Herding
53 Pages Posted: 24 Mar 2008 Last revised: 13 Aug 2008
Date Written: 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.
Keywords: herding, institutional investors
JEL Classification: G10, G12, G14
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