Inertia of Institutional Investors

53 Pages Posted: 24 Jan 2018 Last revised: 27 Mar 2021

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: September 12, 2019

Abstract

We examine institutional investors' tendency to remain unchanged in their portfolio positions for an extended period, called portfolio inertia. Studying 40 million investor-stock quarterly observations, we document that institutional investors do not trade a single share in one of five stocks in their portfolio for at least a quarter of the year. Our analysis shows that institutional investors with high inertia are likely to underperform in the future. Portfolio sorting and the Fama-MacBeth regression analyses also show that stocks with high inertia of institutional investors are likely to underperform in the future, undermining investors' overall performance. We investigate several behavioral biases as potential drivers of inertia and find no evidence of distraction, overconfidence, and disposition effects. We find investors' tendency to sell stocks with salient price movements and recency bias best explains the inertia.

Keywords: inertia, institutional investors, portfolio management, behavioral bias

JEL Classification: G11, G23, G40

Suggested Citation

Irani, Mohammad (Vahid) and Kim, Hugh Hoikwang, Inertia of Institutional Investors (September 12, 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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