Mutual Fund Herding and the Impact on Stock Prices


  • Russ Wermers

    1. Graduate School of Business Administration, University of Colorado at Boulder
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    • Graduate School of Business Administration, University of Colorado at Boulder. This paper was formerly titled, “Herding, Trade Reversals, and Cascading by Institutional Investors,” and is derived from Chapter 3 of my dissertation at The University of California, Los Angeles. I gratefully acknowledge a grant from the UCLA Academic Senate for the purchase of data used in this study. My thanks to Michael Brennan, Yehning Chen, Bhagwan Chowdhry, Nick Crew, Kent Daniel, Allen Huffman, Lisa Kramer, Josef Lakonishok, Francis Longstaff, Richard Roll, Juan Siu, and especially Trudy Cameron, David Hirshleifer, Eduardo Schwartz, and Walt Torous for helpful assistance and comments on this research. Thanks, also, to Toby Moskowitz and Vincent Warther for providing data used in two of the sections of this paper. Most significantly, I thank Mark Grinblatt and Sheridan Titman for their helpful guidance. René Stulz and an anonymous referee also provided many valuable suggestions. Finally, I thank participants in the following conferences and workshops: the 1995 American Finance Association session (in Washington, D.C.) on Portfolio Management (especially Chris Blake, the discussant), the 1995 Western Finance Association session (in Aspen, Colorado) on Investment Styles (especially Allan Timmerman, the discussant), and finance workshops at Penn State University, Southern Methodist University, University of British Columbia, UCLA, University of Colorado, University of Florida, University of Oregon, University of Pennsylvania, University of Southern California, and University of Texas at Austin. An earlier revision of this paper was selected for the NYSE Award for Best Paper on Equity Trading at the 1995 WFA meetings.


We analyze the trading activity of the mutual fund industry from 1975 through 1994 to determine whether funds “herd” when they trade stocks and to investigate the impact of herding on stock prices. Although we find little herding by mutual funds in the average stock, we find much higher levels in trades of small stocks and in trading by growth-oriented funds. Stocks that herds buy outperform stocks that they sell by 4 percent during the following six months; this return difference is much more pronounced among small stocks. Our results are consistent with mutual fund herding speeding the price-adjustment process.