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RFS Advance Access published online on August 11, 2003
Review of Financial Studies, doi:10.1093/rfs/hhg035
Review of Financial Studies © The Society for Financial Studies 2003; all rights reserved
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© 2003 The Society for Financial Studies

Original Articles

Institutional Herding

Richard W. Sias 1*
1 Department of Finance, Insurance, and Real Estate, College of Business and Economics, Washington State University, Pullman, WA 99164-4746

* To whom correspondence should be addressed. E-mail: sias{at}wsu.edu.


  Abstract

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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