Herding behavior in institutional investors: Evidence from China’s stock market

This paper tests how institutional herding affects future excess stock returns in China’s stock market. By employing a hand-collected institutional holding database, we create the herding measure following Lakonishok at el. (1992). The results suggest that both short-term and long-term future excess stock returns are positively correlated with the herding measure. The results hold true for next-day, next-quarter, and next-year excess stock returns. Furthermore, herding effect is found mostly significant on buy side herd and herding affects excess stock returns more significantly during the crisis period. By testing the herding effect for different stock portfolios, we find that when institutional investors herd on larger, value or liquid stocks, the price effect is stronger and short lived, but when institutional investors herd on smaller, growth, or illiquid stocks, the price effect lasts much longer. Finally, persistent herd activities are positively associated with excess stock returns for short to medium time periods (one month and one quarter), but are negatively associated with excess stock returns for a long run.