Inertia of Institutional Investors: Rational or Behavioral?

59 Pages Posted: 24 Jan 2018 Last revised: 14 Sep 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: September 12, 2019

Abstract

We examine institutional investors’ tendency not to change their portfolio for an extended period, called portfolio inertia. Studying over 39 million investor-stock-quarter 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. Trading costs do not fully explain this inertia behavior. We find that the inertia is associated with the inferior future performance of institutional investors. The results suggest that the inertia is driven by a potential behavioral bias, rather than a rational attention allocation strategy aimed at improving overall 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? (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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