Institutional Trade Persistence and Long-term Equity Returns
46 Pages Posted: 16 Mar 2006 Last revised: 30 Jul 2010
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Institutional Trade Persistence and Long-term Equity Returns
Institutional Trade Persistence and Long-Term Equity Returns
Date Written: May 4, 2010
Abstract
Recent studies show that single-quarter institutional herding positively predicts short-term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multi-quarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long-term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.
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