Institutional Herding

Abstract

Institutional investors' demand for a security this quarter is positively correlated with their demand for the security last quarter. These results are attributed to institutional investors following each other into and out of the same securities ("herding")and institutional investors following their own lag trades. Consistent with previous work, we find institutional investors are "momentum" traders. Little of their herding, however, results from momentum trading. Moreover, institutional demand is more strongly related to lag institutional demand than lag returns. Institutional herding declines over time and differs across capitalizations and investor types. Our results are most consistent with the hypothesis that institutional investors herd as a result of inferring information from each other's trades.