IQ from IP: Simplifying Search in Portfolio Choice

34 Pages Posted: 18 Sep 2017 Last revised: 18 Apr 2018

Huaizhi Chen

Harvard Business School - Finance Unit

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Umit G. Gurun

University of Texas at Dallas

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Date Written: September 14, 2017

Abstract

Using a novel database that tracks web traffic on the SEC’s EDGAR servers between 2003 and 2016, we show that mutual funds exert effort to reduce the dimensionality of their portfolio selection problem. Specifically, we show that mutual fund managers’ gather information on a very particular subset of firms and insiders, and their surveillance stays largely unchanged over time. This tracking has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filling by a given firm last quarter increases its likelihood of downloading an insider-trading filing on the same firm by more than 41.3 % this quarter, which is 8 times larger than the unconditional probability of an institution downloading at least one insider trading filing in a quarter from any firm in her existing portfolio (4.8%). Moreover, the average tracked stock that an institution sells generates 7.5% annualized DGTW- adjusted alpha, whereas the sale of an average non-tracked stock has close to zero DGTW adjusted alpha. The outperformance of tracked trades continues for a number of quarters following the tracked insider/institution sale and does not reverse within the sample period. Collectively, these results suggest that the information in tracked trades is important for fundamental firm value, and is only revealed following the information-rich dual trading by insiders and linked institutions.

Keywords: Tracked trades, Return predictability, Institutional trading, Insider trading

JEL Classification: G11, G14, G23

Suggested Citation

Chen, Huaizhi and Cohen, Lauren and Gurun, Umit G. and Lou, Dong and Malloy, Christopher J., IQ from IP: Simplifying Search in Portfolio Choice (September 14, 2017). 8th Miami Behavioral Finance Conference 2017. Available at SSRN: https://ssrn.com/abstract=3037282 or http://dx.doi.org/10.2139/ssrn.3037282

Huaizhi Chen

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Lauren Cohen

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Umit G. Gurun (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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