Mutual Fund Herding and the Impact on Stock Prices

doi:10.1111/0022-1082.00118

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Wiley InterScience

The Journal of Finance

Volume 54 Issue 2, Pages 581 - 622

Published Online: 17 Dec 2002

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Mutual Fund Herding and the Impact on Stock Prices

Russ Wermers

¹ Graduate School of Business Administration, University of Colorado at Boulder

ABSTRACT

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.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/0022-1082.00118 About DOI