Inertia of Institutional Investors: Rational or Behavioral?
59 Pages Posted: 24 Jan 2018 Last revised: 1 Apr 2019
Date Written: March 30, 2019
We examine institutional investors’ tendency not to trade a single share of a stock for an extended period. Studying over 37 million investor-stock-quarter observations, we find that institutional investors do not trade a single share in one of four stocks in their portfolio over the reporting periods. Trading costs do not fully explain this inertia behavior. The institutional investors in the highest-inertia quintile group underperform those in the lowest quintile by 0.8% – 1.52% per year. The results suggest that the inertia is driven by a potential behavioral bias, rather than by a rational attention allocation strategy aimed at improving performance.
Keywords: inertia, institutional investors, limited attention, stock returns, fund performance
JEL Classification: G11, G23, G40
Suggested Citation: Suggested Citation