Delegated trading and the speed of adjustment in security prices

Roger M. Edelen and Gregory B. Kadlec

Journal of Financial Economics, 2012, vol. 103, issue 2, 294-307

Abstract: Institutional trading arrangements often involve the portfolio manager delegating the task of trade execution to a separate division within the firm. We model the agency conflict that arises in this setting and show that optimal performance benchmarks often create an incentive to execute orders contrary to concurrent information flow. We hypothesize that aggregate contrarian trading resulting from widespread application of such benchmarks leads to delays in the assimilation of information in security prices. Using institutional trading data, we document the hypothesized contrarian trading pattern and relate the pattern to price-adjustment delays in the response of individual stocks to index futures returns. The evidence supports the assertion that delegated institutional trading contributes to these delays.

Keywords: Trading; Agency conflict; Institutional investing (search for similar items in EconPapers)
JEL-codes: G14 G23 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:103:y:2012:i:2:p:294-307

DOI: 10.1016/j.jfineco.2010.11.008

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