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

Authors

Kingsley Y. L Fong, University of New South Wales
David R. Gallagher, University of Technology, Capital Markets CRC LimitedFollow
Peter A. Gardner, Plato Investment Management
Peter Swan, University of New South WalesFollow

RIS ID

118619

Publication Details

Fong, K. Y. L., Gallagher, D. R., Gardner, P. A. & Swan, P. L. (2011). Follow the leader: Fund managers trading in signal-strength sequence. Accounting and Finance, 51 (3), 684-710.

Abstract

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 funds' 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. 2010 The Authors. Accounting and Finance 2010 AFAANZ.