Inertia of Institutional Investors: Rational or Behavioral?

59 Pages Posted: 24 Jan 2018 Last revised: 1 Apr 2019

See all articles by Mohammad (Vahid) Irani

Mohammad (Vahid) Irani

University of South Carolina - Darla Moore School of Business

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business

Date Written: March 30, 2019

Abstract

We examine institutional investors’ tendency not to trade a single share of a stock for an extended period. Studying over 37 million investor-stock-quarter observations, we find that institutional investors do not trade a single share in one of four stocks in their portfolio over the reporting periods. Trading costs do not fully explain this inertia behavior. The institutional investors in the highest-inertia quintile group underperform those in the lowest quintile by 0.8% – 1.52% per year. The results suggest that the inertia is driven by a potential behavioral bias, rather than by a rational attention allocation strategy aimed at improving performance.

Keywords: inertia, institutional investors, limited attention, stock returns, fund performance

JEL Classification: G11, G23, G40

Suggested Citation

Irani, Mohammad (Vahid) and Kim, Hugh Hoikwang, Inertia of Institutional Investors: Rational or Behavioral? (March 30, 2019). Available at SSRN: https://ssrn.com/abstract=3103741 or http://dx.doi.org/10.2139/ssrn.3103741

Mohammad (Vahid) Irani (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

HOME PAGE: http://sc.edu/study/colleges_schools/moore/directory/irani_mohammad.php

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

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