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

Kingsley Y.L. Fong*, David R. Gallagher, Peter A. Gardner, Peter L. Swan

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)684-710
Number of pages27
JournalAccounting and Finance
Issue number3
Publication statusPublished - Sept 2011
Externally publishedYes


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