The Behavior of Stock Prices Around Institutional Trades

Authors

  • LOUIS K. C. CHAN,

  • JOSEF LAKONISHOK

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    • College of Commerce, University of Illinois at Urbana-Champaign, Champaign, Illinois. We thank Gil Beebower and Vasant Kamath from SEI for providing us with the data and for sharing their insights on various aspects of trading. This article has been presented at the 1994 AFA Meetings, the Amsterdam Institute of Finance, the Berkeley Program in Finance (Squaw Valley), Columbia University, the CRSP seminar at the University of Chicago, INSEAD, the 1992 NBER Summer Conference on Behavioral Finance, the University of Illinois, the 1994 USC/UCLA/NYSE Conference on Market Micro-Structure, and the 1994 WFA Meetings. We thank David Mayers (the editor), Bill Bryan, Peter Colwell, Dick Dietrich, Eugene Fama, Gene Finn, William Goetzmann, George Gross, Joel Hasbrouck, Eric Hughson, Jayendu Patel, Jay Ritter, Andrei Shleifer, an anonymous referee, and seminar participants for their comments. Rohit Gupta and Peng Tu provided outstanding research assistance. Computing support was provided by the National Center for Supercomputing Applications, University of Illinois at Urbana-Champaign.


ABSTRACT

All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence (“package”) of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size, and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.

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