Three Essays on Trading Behavior of Professional Investors

Abstract

In this dissertation, I investigate the trading behavior of professional investors, who are generally assumed to trade rationally. In the first essay, I investigate two issues. The first issue is whether the fund concentration is the outcome of managers overconfident behavior. For this analysis, I examine the relationship between fund performance and the portfolio concentrations held by funds. Comparing the performance between diversified funds and focused funds, I find that concentrated funds are induced by the overconfident behavior of managers. The second issue is what drives managers to be overconfident. I explore whether self-attribution bias, demographic characteristics of managers, and/or sharing-the-blame effect cause managers to be overconfident. For this test, I investigate how a past funds performance, the managers age, the managers experience, and the number of managers managing a certain fund are related to the fund concentration level. I find that age and the number of managers strongly drive overconfidence, suggesting that demographic characteristics and the sharing-the-blame effect are sources of overconfidence rather than self-attribution bias. The second essay studies how herding behavior affects the performance of equity funds in the Korean active fund industry. By adopting the bootstrapping simulation methodology, this essay proposes that the superior performance of the Korean equity funds which have made investments in the domestic market is driven by luck rather than by the skill of the managers. The second essay also finds that the strong propensity to herd among managers prevents managerial ability from being linked to fund performance. The third essay examines the herding behavior of professional investors and its impact on stock prices. For this purpose, I investigate the stock return movement following intense buy and sell herding of professionals over short-term and long-term periods. I find asymmetric effects of buy and sell herding in the financial market. I find that sell herding is driven by information and that it helps to impound information into prices. In contrast, buy herding is not induced by information and drives stock prices away from the fundamentals. I also find that stronger return reversal following the intense buy herding of professionals is positively related to high information asymmetry, which supports the previous finding that buy herding is not driven by correct information on fundamentals.