Does Investment Horizon Matter? Disentangling the Effect of Institutional Herding on Stock Prices

• Main Author: Yuksel, Hasan Zafer
• Other Authors: Jiang, George J.
• Language: en
• Published: The University of Arizona. 2012
• Subjects: Management; institutional herding; price impact
• Online Access: http://hdl.handle.net/10150/232474

Existing studies document that institutional herding has a stabilizing effect on stock prices, as stock returns are positively correlated with herding over one- to three-quarter horizons. The literature also shows that short-term institutions are better informed than long-term institutions. Motivated by heterogeneity in the level of informed trading between short-term and long-term institutions, this study disentangles the herding effect of short-term and long-term institutions on stock prices. Our results show that herding by short-term institutions promotes price discovery. In contrast, herding by long-term institutions drives stock prices away from fundamentals. Taken together, our findings suggest that the stabilizing effect documented in the existing literature is mainly driven by short-term institutions, and herding by long-term institutions has a destabilizing effect on stock prices.