Abstract
AbstractWe document that institutional investors do not trade a single share, on average, in one of five stocks in their portfolio for an extended period. Investors with high inaction are likely to underperform in the future. Our results show a similar underperformance for stocks with a high non‐trading level of institutional investors. We investigate several behavioral biases as potential drivers of the non‐trades and find no evidence of distraction, overconfidence, and disposition effects. Institutional investors’ tendency to sell stocks with salient price movements and recency bias best explains their inactions. Overall, the non‐trading behavior of institutional investors serves as a unique predictor for their future performance and potential behavioral biases are driving this predictability.
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