Follow the leader: Fund managers trading in signal-strength sequence

Blackwell Publishing
Publication Type:
Journal Article
Accounting & Finance, 2011, 51 (3), pp. 684 - 710
Issue Date:
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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 fundsï½ 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.
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