Recent studies show that single-quarter institutional herding positively predicts short-term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multiquarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long-term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.A GROWING LITERATURE ON THE trading behavior of institutional money managers shows that they exhibit a tendency to herd, that is, to imitate each others' trades. Given the increasing prevalence of such investors in financial markets, the potential price impact of institutional herding is of great interest. Institutional herding behavior is generally found to have a stabilizing effect on prices. Several well-known studies find a positive correlation between the direction of institutional herding and future stock returns, thus concluding that institutional trading pushes prices towards equilibrium values. For example, Wermers (1999) shows that stocks heavily bought by mutual funds during a given quarter outperform stocks heavily sold by funds in that quarter, over the subsequent 6 months. Sias (2004) finds that institutional demand is positively * Amil Dasgupta, Andrea Prat, and Michela

This paper …nds that the betas of individual stocks increase by an economically and statistically signi…cant amount on days of quarterly earnings announcements, and revert to their average levels two to …ve days later. The increase in beta is greater for large positive or negative earnings surprises, for announcements that resolve greater uncertainty, and for more liquid and more visible stocks. These empirical results are based on estimates of daily …rm-level betas obtained from intra-day prices for all constituents of the S&P 500 index over the period 1996-2006. These …ndings are consistent with a model of expectations formation in which investors learn about the pro…tability of a given …rm by using information on other …rms.

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