Mutual Fund Herding and the Impact on Stock Prices

We analyze the trading activity of the mutual fund industry between 1975 and 1994 to determine whether funds "herd" when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by four percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process.

[1]  H. Stoll,et al.  Parallel Trading by Institutional Investors , 1972, Journal of Financial and Quantitative Analysis.

[2]  Robert C. Klemkosky.  THE IMPACT AND EFFICIENCY OF INSTITUTIONAL NET TRADING IMBALANCES , 1977 .

[3]  Seymour Smidt,et al.  Volume for Winners and Losers: Taxation and Other Motives for Stock Trading , 1986 .

[4]  S. Titman,et al.  The evaluation of mutual fund performance: An analysis of monthly returns , 1989 .

[5]  Sheridan Titman,et al.  Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings , 1989 .

[6]  Kenneth A. Froot,et al.  Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation , 1990 .

[7]  Andrei Shleifer,et al.  Window Dressing by Pension Fund Managers , 1991 .

[8]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[9]  S. Bikhchandani,et al.  You have printed the following article : A Theory of Fads , Fashion , Custom , and Cultural Change as Informational Cascades , 2007 .

[10]  D. Hirshleifer,et al.  Security Analysis and Trading Patterns When Some Investors Receive Information Before Others , 1994 .

[11]  Brett Trueman.  Analyst Forecasts and Herding Behavior , 1994 .

[12]  S. Titman,et al.  Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior , 1994 .

[13]  Josef Lakonishok,et al.  Momentum Strategies , 1995 .

[14]  Vincent A. Warther.  Aggregate mutual fund flows and security returns , 1995 .

[15]  Eric G. Falkenstein,et al.  Preferences for Stock Characteristics As Revealed by Mutual Fund Portfolio Holdings , 1996 .

[16]  R. Wermers,et al.  Momentum Investment Strategies of Mutual Funds , Performance Persistence , and Survivorship Bias , 1997 .

[17]  Kent D. Daniel,et al.  Measuring mutual fund performance with characteristic-based benchmarks , 1997 .

[18]  Laura T. Starks,et al.  Return autocorrelation and institutional investors , 1997 .

[19]  J. Graham.  Herding Among Investment Newsletters: Theory and Evidence , 1998 .

[20]  René M. Stulz,et al.  International Portfolio Flows and Security Markets , 1999 .

[21]  John R. Nofsinger,et al.  Herding and Feedback Trading by Institutional and Individual Investors , 1999 .

[22]  I. Welch.  Herding among security analysts , 2000 .

[23]  Bengt Holmstrom,et al.  Herd Behavior and Investment , 2022 .