Portfolio Manager Ownership, Herding and Stock Returns

Abstract:
Using a new dataset on portfolio manager ownership, I analyze the “herding” (trading together) behavior of managers, conditional on their ownership stakes in the funds they manage. I find that the funds with low and high managerial ownership have economically distinct patterns in their herding behavior. Each herd has its own distinct trading style and different qualitative and quantitative effect on stock prices. Low ownership funds herd more and engage in positive-feedback trading that is followed by stock price reversals. High ownership fund herding is followed by more stable price adjustments. Low ownership herding effects appear to dominate in the full sample where herding causes price reversal. These findings suggest that there is heterogeneity in the herding behavior of mutual funds, which appears to be related with ownership. It is costly for the high ownership managers to ignore their substantive information due to reputational concerns, or to engage in uninformed trading, and thus herding by such managers results in more informative prices. On the other hand, lower ownership fund herding appears to be driven by agency that generates temporary price movements that are reversed.