Institutional Industry Herding

53 Pages Posted: 24 Mar 2008 Last revised: 13 Aug 2008

Nicole Y. Choi

University of Wyoming - Department of Economics and Finance

Richard W. Sias

University of Arizona - Department of Finance

Date Written: August 8, 2008

Abstract

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

Suggested Citation

Choi, Nicole Y. and Sias, Richard W., Institutional Industry Herding (August 8, 2008). Available at SSRN: https://ssrn.com/abstract=1107491 or http://dx.doi.org/10.2139/ssrn.1107491

Nicole Y. Choi

University of Wyoming - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States

Richard W. Sias (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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