J. Lakonishok et d.. The impact of institutional truding on stock prices 41
This evidence suggests that, within the smallest stocks, either institutions sell
recent losers, or they depress the prices of stocks they sell.
The results for the second size quintile are consistent with either intraquarter
positive-feedback trading or the direct impact of institutional trades on share
prices. The mean abnormal return for stocks for which purchases exceed sales is
2.8%, and the mean return for stocks for which sales exceed purchases is
- 1.8%. These returns are roughly monotonic in the magnitude of excess
demand. In the third size quintile, we again see positive returns for stocks for
which purchases exceed sales, but negative returns only for stocks for which
the excess of sales over purchases is the largest. Again, however, there is a
rough monotonic relationship between excess demand and abnormal returns,
indicating either price pressure by institutions or intraquarter positive-feedback
trading.
Even these rough relationships, however, disappear in the two largest size
quintiles, in which institutional trading is concentrated. In the fourth quintile,
both the stocks which are bought, on net, and sold, on net, earn a positive excess
return. Moreover, stocks for which the excess supply by institutions is the largest
have an abnormal return of 2.0%. In the largest quintile, stocks which institu-
tions buy, on net, have lower abnormal returns than stocks which institutions
sell, on net, which seems more consistent with stabilizing negative-feedback
trading. Indeed, stocks with the largest excess demand have a return of - OS%,
and stocks with the largest excess supply have a return of 3.1%. What little
support we saw for positive-feedback trading or price pressure from institutions
in smaller quintiles disappears in the largest two quintiles.
In sum, the results of this section are the least conclusive. Stocks that
institutions buy, on net, have higher contemporaneous abnormal returns than
stocks that institutions sell, on net.’ However, a closer inspection reveals that
‘In tables 4 and 5. we explored the relation between past returns and current excess demand by
money managers. In table 6, we looked at current returns and current excess demand. Another
question is: What is the relation between future returns and current excess demand? This question
has more to do with the short-run profitability of the strategies pursued by pension managers than
with the destabilization question. Friedman (1953) has argued that if prices move in one’s favor after
trading. then one has contributed to price stabilization. The problem is how to rule out strategies
that are short-run-profitable but may actually be destabilizing in the long run. This problem is
especially serious when future returns cannot be estimated very precisely o\er a long period of time.
We have examined the relationship between current excess demand and one-quarter-ahead
returns without drawing conclusions about the role of institutions in promoting price stability from
these results. The evidence. while quite mixed. suggests that pension fund trading in the smallest
three quintiles of stocks is profitable in the short run. while trading in the two largest quintiles is
neither particularly profitable or unprofitable in the short run. In other words, when pension funds
are net sellers ofsmaller stocks. future prices tend to fall over the next quarter and prices tend to rise
when the funds are net buyers. However. the magnitude of the future return differences as a function
of past excess demands is relatively small and there are also some anomalous aspects of the results.
For example, across all five quintiles. some of the most negative returns occur after large net buying
by fund managers in the previous quarter.