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RFS Advance Access originally published online on August 11, 2003
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Rev Fin 2004; 17:165-206
© 2004 The Society for Financial Studies

Institutional Herding

Richard W. Sias
Washington State University

Address correspondence to Richard Sias, Department of Finance, Insurance, and Real Estate, College of Business and Economics, Washington State University, Pullman, WA 99164-4746.

Institutional investors' demand for a security this quarter is positively correlated with their demand for the security last quarter. We attribute this to institutional investors following each other into and out of the same securities ("herding") and institutional investors following their own lag trades. Although institutional investors are "momentum" traders, little of their herding results from momentum trading. Moreover, institutional demand is more strongly related to lag institutional demand than lag returns. Results are most consistent with the hypothesis that institutions herd as a result of inferring information from each other's trades.


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