Herding and Feedback Trading by Institutional and Individual Investors


  • John R. Nofsinger,

    1. Marquette University
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  • Richard W. Sias

    1. Washington State University
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    • Nofsinger is from Marquette University and Sias is from Washington State University. The authors thank Larry Glosten, John Kling, Wayne Marr, Thomas McInish, Frank Reilly, Laura. Starks, Sheridan Titman, Russ Wermers, seminar participants at the 1997 Chicago Quantitative Alliance (CQA) Meetings, the 1997 Financial Management Association Meetings, 1997 Midwest Finance Meetings, 1996 Western Finance Association Meetings, 1995 Financial Management Association Doctoral Consortium, Bond University (Australia), Colorado State University, Marquette University, the University of Otago (New Zealand), SUNY-Binghamton, the University of Texas at Austin, and Washington State University, and especially René Stulz and an anonymous referee for helpful comments on various versions of this work. We also thank the NYSE for providing the TORQ data and Joel Hasbrouck, George Sofianos, and B. Radhakrishna for their assistance in interpreting the TORQ data. Earlier versions of this paper were selected as the CQA Academic Competition Winner and the Financial Management Association (FMA) 1997 Best of the Best Award. Remaining errors are the responsibility of the authors.


We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positive-feedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return mean-reversion in the year following large changes in institutional ownership—stocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.