NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Institutional Investors Destabilize Stock Prices? Evidence on Herding and Feedback Trading

Josef Lakonishok, Andrei Shleifer, Robert W. Vishny

NBER Working Paper No. 3846
Issued in September 1991
NBER Program(s):   ME

This paper uses a new data set of quarterly portfolio holdings of 769 all-equity pension funds between 1985 and 1989 to evaluate the potential effect of their trading on stock prices. We address two aspects of trading by money managers: herding, which refers to buying (selling) the same stocks as other managers buy (sell) at the same time; and positive-feedback trading, which refers to buying winners and selling losers. These two aspects of trading are commonly a part of the argument that institutions destabilize stock prices. At the level of individual stocks at quarterly frequencies, we find no evidence of substantial herding or positive-feedback trading by pension fund managers, except in small stocks. Also, there is no strong cross-sectional correlation between changes in pension funds' holdings of a stock and its abnormal return.

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Document Object Identifier (DOI): 10.3386/w3846

Published: "The Impact of Institutional Investors on Stock Prices", Journal of Financial Economics, August 1992, vol 32, no. 1, pp 23-43

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