Abstract

As previous agency models have shown, fund managers with career concerns have an incentive to imitate the recent trading strategy of other managers. We embed this rational conformist tendency in a stylized financial market with limited arbitrage. Equilibrium prices incorporate a reputational premium or discount, which is a monotonic function of past trade between careerdrive traders and the rest of the market. Our prediction is tested with quarterly data on US institutional holdings from 1983 to 2004. We find evidence that stocks that have been persistently bought (sold) by insitutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our result is of a similar order of magnitude of — but cannot be reconduced to — other known price anomalies. Our findings challenge the mainstream view of the roles played by individuals and institutions in generating price anomalies.

Citations