Inertia of Institutional Investors
53 Pages Posted: 24 Jan 2018 Last revised: 27 Mar 2021
Date Written: September 12, 2019
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: Suggested Citation