Institutional investors now hold over half of US equities, and most of this money is managed by professional money managers. Although progressively more of that money is put into index funds -- a strategy suggested by standard finance models -- the majority is still managed actively. That is, money managers allocate money between stocks and bonds, and choose individual securities within both groups. Despite the important role played by professional money managers in financial markets, there has been relatively little research on money management so far, particularly on institutional money management. This project studies the behavior of institutional investors and the impact of their trading on stock prices using three data sets. The first data set covers 769 pension funds and gives their quarterly portfolio holdings over 1985-1989. The second data set covers 37 very large money management firms and gives their daily trades during 1986-1988. The third data set covers 143 open end mutual funds and gives their annual performance during 1965-1984. The project addresses empirically the following broad questions: 1. How prevalent are particular types of investment strategies among institutional money mangers? Are managers consistent over time in following a particular strategy? 2. What is the nature of the agency relationship between fund sponsors and managers, and how does it affect the trading strategies of the funds? In particular what is the role of the trading horizon, of the compensation arrangements, and of relative performance evaluation? 3. How does excess demand by institutions affect stock prices? Do institutions herd? Based on the strategies they follow and their herding tendencies, are institutions likely to have a destabilizing influence on stock prices in the sense of moving them away from fundamental values?
