Follow the leader: Fund managers trading in signal-strength sequence

When fund managers trade sequentially in the same direction, the information confirmation hypothesis predicts the long-term profitability of the leader trade to be increasing in the number of subsequent trades. The information cascade hypothesis predicts a non-positive relationship. Using active equity funds' daily trading data, we document a transition from information confirmation to information cascades as the number of followers increase. We find that highly disguised multiple-broker packages exhibit higher market impact, higher long-term returns and are associated with fewer followers. Our study also documents that lead fund managers face portfolio risk constraints in trading on private information.