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Follow the leader: fund managers trading in signal‐strength sequence *
Author(s) -
Fong Kingsley Y. L.,
Gallagher David R.,
Gardner Peter A.,
Swan Peter L.
Publication year - 2011
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2010.00367.x
Subject(s) - business , portfolio , equity (law) , trading strategy , profitability index , private information retrieval , finance , monetary economics , economics , computer science , computer security , political science , law
When fund managers trade sequentially in the same direction, the information confirmation hypothesis predicts the long‐term profitability of the leader trade to be increasing in the number of subsequent trades. The information cascade hypothesis predicts a non‐positive relationship. Using active equity funds’ daily trading data, we document a transition from information confirmation to information cascades as the number of followers increase. We find that highly disguised multiple‐broker packages exhibit higher market impact, higher long‐term returns and are associated with fewer followers. Our study also documents that lead fund managers face portfolio risk constraints in trading on private information.