Institutional Trade Persistence and Long-term Equity Returns

Recent studies show that single-quarter institutional herding positively predicts short-term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the e¤ect of multi-quarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we …nd that persistent institutional trading negatively predicts long-term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership. Amil Dasgupta, Andrea Prat, and Michela Verardo are at the London School of Economics. We thank Markus Brunnermeier, Gregory Connor, David Hirshleifer, Arvind Krishnamurthy, Antonio Mele, Stefan Nagel, Andrew Patton, Christopher Polk, Dimitri Vayanos, Avi Wohl, Motohiro Yogo, and audiences at Berkeley Haas, Birkbeck, Birmingham, Chicago GSB, Collegio Carlo Alberto, Columbia University, Duke Fuqua, the 2006 EFA meetings, Emory University Goizueta Business School, Georgetown, HEC, the 2006 ASAP conference, London School of Economics, Maryland, the 2006 NBER Behavioral Finance meetings, Northwestern, Norwegian School of Economics, NYU Stern, Pompeu Fabra, University of Rochester Simon Business School, SOAS Financial and Management Studies, Stanford, University of Amsterdam, University College London, University of Warwick, and Wharton for helpful comments and discussions. We are grateful to Campbell Harvey (the editor), two anonymous referees, and an anonymous associate editor for many insightful comments and suggestions. Dasgupta thanks the EPSRC for …nancial support via grant GR/S83975/01. An earlier draft of this paper was circulated with the title “The Price of Conformism.”