Inertia of Institutional Investors: Rational or Behavioral?
59 Pages Posted: 24 Jan 2018 Last revised: 14 Sep 2019
Date Written: September 12, 2019
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: Suggested Citation