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Does Investment Horizon Matter? Disentangling the Effect of Institutional Herding on Stock Prices
Author(s) -
Yüksel H. Zafer
Publication year - 2015
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12080
Subject(s) - herding , predictability , economics , stock (firearms) , institutional investor , financial economics , monetary economics , term (time) , investment (military) , herd behavior , finance , corporate governance , geography , physics , archaeology , quantum mechanics , politics , political science , law , forestry
This study finds that, over short horizons, herding by short‐term institutions promotes price discovery. In contrast, herding by long‐term institutions drives stock prices away from fundamentals over the same periods. Furthermore, while the positive predictability of short‐term institutional herding for stock prices is more pronounced for small stocks and stocks with high growth opportunities, the negative association between long‐term institutional herding and stock prices is stronger for stocks whose valuations are highly uncertain and subjective. Finally, we show that the destabilizing effect of institutional herding persistence documented in the recent literature is entirely driven by persistent herding by long‐term institutions.