IQ from IP: Simplifying Search in Portfolio Choice

54 Pages Posted: 18 Sep 2017 Last revised: 13 Jul 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)

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2017

Abstract

Using a novel database that tracks web traffic on the SEC’s EDGAR servers between 2004 and 2015, we show that mutual fund managers gather information on a very particular subset of firms and insiders, and their surveillance is very persistent over time. This tracking behavior has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filing 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. Moreover, the average tracked stock that an institution buys generates annualized alphas of between 9-18% relative to the purchase of an average non- tracked stock. We find that institutional managers tend to track members of the top management teams of firms (CEOs, CFOs, Presidents, and Board Chairs), and tend to share educational and location-based commonalities with the specific insiders they choose to follow. Collectively, our 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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