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The impact of signal dependence and own ability awareness on herding behaviour: a tale of two managers

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Author Info
Xeni Dassiou (Department of Economics, City University, Northampton Square, London EC1V 0HB, UK)

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Abstract

This model examines the case of managers whose signals, when informative, are perfectly correlated as in the Scharfstein and Stein model [1990. The American Economic Review 80(3): 465-479]. This has a herd increasing impact as it introduces a positive reputation externality. On the other hand, it is also assumed that managers have perfect knowledge of their own ability, an assumption with herd reducing implications. Combining these two offsetting, in terms of herding, assumptions, it is found that a smart manager who plays first will sometimes, but not always, truthfully announce his|her private information. On the other hand, a smart manager who plays second will always report his|her true signal, while a dumb manager who plays second may herd, either on the first manager's action and|or on the prior. It is also found that the more likely a dumb manager who plays second is to herd on the first manager's action, the less likely is a smart manager who plays first to herd on the prior. Copyright © 1999 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 20 (1999)
Issue (Month): 7 ()
Pages: 379-395
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Handle: RePEc:wly:mgtdec:v:20:y:1999:i:7:p:379-395

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, 02. [Downloadable!] (restricted)
  2. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(1), pages 97-124. [Downloadable!] (restricted)
  3. Marco Ottaviani & Peter Sorensen, 2000. "Herd Behavior and Investment: Comment," American Economic Review, American Economic Association, vol. 90(3), pages 695-704, June. [Downloadable!] (restricted)
  4. Avery, Christopher N. & Chevalier, Judith A., 1999. "Herding over the career," Economics Letters, Elsevier, vol. 63(3), pages 327-333, June. [Downloadable!] (restricted)
  5. Prendergast, Canice & Stole, Lars, 1996. "Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1105-34, December. [Downloadable!] (restricted)
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