Does Investment Horizon Matter? Disentagling the Effect of Institutional Herding on Stock Prices
Posted: 9 Oct 2013
Date Written: July 1, 2013
Abstract
Exiting studies document that institutional herding has a stabilizing effect on stock prices, as stock returns over one- to three-quarter horizons are positively correlated with herding. The literature also shows that short-term institutions are better informed than long-term institutions. Motivated by heterogeneity in the level of informativeness between short-term and long-term institutional trading, this study disentangles the price impact of short-term and long-term institutional herding. Our results show that herding by short-term institutions promotes price discovery. In contrast, herding by long-term institutions drives stock prices away from fundamentals. Taken together, our findings suggest that the stabilizing effect documented in the existing literature is mainly driven by short-term institutions, and the destabilizing effect of long-term institutional herding persists up to eight quarters.
Keywords: Institutional Herding, Investment Horizon, Price Impact
JEL Classification: G11, G12, G14, G20
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