The Impact of Strategic Investor Activism on Institutional Trading and Portfolio Returns

47 Pages Posted: 26 Feb 2007 Last revised: 30 Mar 2008

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Peter Gardner

Plato Investment Management

David R. Gallagher

Rozetta Institute

Date Written: October 23, 2007

Abstract

We investigate several implications of activism by institutional investors/monitors in the microstructure equilibrium postulated by Noe (2002). The decision whether or not to monitor, which reveals the firm's value to the fund, is stochastic. Empirically, we show that net-of-transaction-cost portfolio returns of the daily trades of active institutional fund managers are independent of their stock turnover rates. This is supportive of Noe's equilibrium in which the investor makes informed choices when she monitors and may trade "randomly" when she does not. We then identify the empirical counterpart to these "random" trades in the form of institutional "churning" trades of marginal profitability that have the effect of lowering rather than raising bid-ask spreads. These falls indicate the degree of success in camouflaging informed longer-term positions. While churning trades appear to be subject to psychological biases identified in the behavioral literature, we show that this is not the case, emphasizing their role in improving the institution's trading environment.

Keywords: Short-term Trading, Disposition Effect, Portfolio Turnover, Institutional Activism, Monitoring

JEL Classification: G23

Suggested Citation

Swan, Peter Lawrence and Gardner, Peter and Gallagher, David R., The Impact of Strategic Investor Activism on Institutional Trading and Portfolio Returns (October 23, 2007). Available at SSRN: https://ssrn.com/abstract=965593 or http://dx.doi.org/10.2139/ssrn.965593

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Gardner

Plato Investment Management ( email )

Level 14, 167 Macquarie St
Sydney, New South Wales 2066
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

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