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Inertia of Institutional Investors, Stock Returns, and Performance

40 Pages Posted: 24 Jan 2018 Last revised: 19 Feb 2018

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: February 16, 2018

Abstract

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

Suggested Citation

Irani, Mohammad (Vahid) and Kim, Hugh Hoikwang, Inertia of Institutional Investors, Stock Returns, and Performance (February 16, 2018). Available at SSRN: https://ssrn.com/abstract=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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