This study* shows that institutions typically trade on the wrong side of anomalies. For instance, they tend to buy growth stocks and sell value stocks, thereby going directly against the value anomaly.
The study also finds that anomalous returns are concentrated primarily in stocks with institutions on the wrong side of the implied mispricing, and argues that a behavioral explanation for these results appears to be most plausible. This may seem odd because institutions are generally thought of as ‘smart’ and well aware of the decades-old anomalies literature.
On the other hand, it is also plausible because institutional money management entails agency conflicts that have been documented before to result in suboptimal portfolio decisions, such as excessive turnover and herding for reputational reasons. Moreover, if anomalous returns are a consequence of mispricing, then the most obvious source of an impact big enough to distort asset prices is the beast with the largest footprint – institutions.
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