Inertia of Institutional Investors, Stock Returns, and Performance
43 Pages Posted: 24 Jan 2018 Last revised: 19 Mar 2018
Date Written: March 14, 2018
This paper examines a group of stocks not frequently traded by institutional investors, termed as “inertia stocks.” Studying over 28 million institutional investor-stock-quarter level observations, we find that institutional investors do not trade a single share for one out of four firms in their portfolio over more than three months. These stocks are small and illiquid, but size and illiquidity do not fully explain their non-trading tendency. Inertia stocks are likely to underperform in the future, hence undermining the overall performance of institutional investors. Institutional investors make some profits from actively trading other stocks, but the additional profits do not cover the loss from inertia stocks. The results suggest that institutional investors can increase their overall performance by understanding the adverse effect of inertia stocks.
Keywords: inertia, institutional investors, limited attention, stock returns, fund performance
JEL Classification: G11, G23, G40
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