The behavior of stock prices around institutional trades

58 Pages·1993·2 MB·English

by  Chan, Louis K. C. (Louis Kuo Chi), 1955-

330 s~r
B3S5
1993: 12? COPY 2
Faculty working Paper 93-0129
The Behavior of Stock Prices Around
Institutional Trades
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Louis K. C Chan JosefLakonishok
Department ofFinance Department ofFinance
University ofIllinois University ofIllinois
Bureau of Economic and Business Research
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign

BEBR
FACULTY WORKING PAPER NO. 93-0129
College of Commerce and Business Administration
University of Illinois at Urbana-Champaign
April 1993
The Behavior of Stock Prices Around
Institutional Trades
Louis K. C. Chan
Josef Lakonishok
Department of Finance
Digitized by the Internet Archive
in 2011 with funding from
University of Illinois Urbana-Champaign
http://www.archive.org/details/behaviorofstockp93129chan
THE BEHAVIOR OF STOCK PRICES AROUND
INSTITUTIONAL TRADES
Louis K. C. Chan and Josef Lakonishok
College of Commerce, University of Illinois at
Urbana-Champaign, Champaign, Illinois 61820
April 1993
We thank Gil Beebower and Vasant Kamath from SEI for providing us with the data
and for sharing their insights on various aspects of trading. This paper has
been presented at the Amsterdam Institute of Finance, the Berkeley Program in
Finance (Squaw Valley), Columbia University, the CRSP seminar at the University
of Chicago, INSEAD, the 1992 NBER Summer Conference on Behavioral Finance and
the University of Illinois. We thank Eugene Fama, Gene Finn, William Goetzmann,
Jayendu Patel, Jay Ritter, Andrei Shleifer and seminar participants for their
comments. Rohit Gupta and Peng Tu provided outstanding research assistance.
Computing support was provided by the National Center for Supercomputing
Applications, University of Illinois at Urbana-Champaign.

Abstract
Previous studies of the effects of stock trading on prices consider an
individual trade as the basic unit of analysis. Since many institutional
investors' orders are broken up into several trades, the usual approach to
measuring price impact or execution cost based on individual trades may be
biased. Instead, this paper uses the record of all trades executed by 37 large
investment management firms from July 1986 to December 1988 to study the price
impact and execution cost of the entire sequence ("package'') of trades
constituting an order. We analyze the importance of firm capitalization,
package size and the management firm's identity as determinants of market impact
and trading cost.