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Institutional herding in international markets

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  • Choi, Nicole
  • Skiba, Hilla

Abstract

This paper studies herding behavior of institutional investors in international markets. First, we document the existence of wide-spread herding in 41 countries (referred to as “target countries” hereafter) in the sample. We then examine the relation between contemporaneous institutional demand and future returns and find that institutional herding stabilizes prices. Next, we examine the relation between institutional investors’ herding behavior and the level of information asymmetry in the target countries. We measure the degree of information asymmetry in each target country along five dimensions: (1) stock market development, (2) ease of access to information, (3) corporate transparency, (4) investor rights, and (5) macroeconomic factors that relate to the information environment. We find evidence that institutional investors herd more in markets characterized by low levels of information asymmetry (high level of information transparency). This result suggests that institutional investors’ herding behavior is likely driven by correlated signals from fundamental information. Lastly, we show that price adjustment is faster in informationally transparent markets.

Suggested Citation

  • Choi, Nicole & Skiba, Hilla, 2015. "Institutional herding in international markets," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 246-259.
  • Handle: RePEc:eee:jbfina:v:55:y:2015:i:c:p:246-259
    DOI: 10.1016/j.jbankfin.2015.02.002
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    Citations

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    Cited by:

    1. Ashish Kumar Garg & Subrata Kumar Mitra & Dilip Kumar, 2016. "Do foreign institutional investors herd in emerging markets? A study of individual stocks," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(3), pages 281-300, September.
    2. repec:eee:finlet:v:24:y:2018:i:c:p:328-336 is not listed on IDEAS
    3. repec:bpj:ajlecn:v:7:y:2016:i:3:p:369-383:n:2 is not listed on IDEAS
    4. Ian Koetsier & Jacob Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," DNB Working Papers 569, Netherlands Central Bank, Research Department.
    5. repec:eee:pacfin:v:45:y:2017:i:c:p:174-185 is not listed on IDEAS
    6. Vo, Xuan Vinh, 2016. "Does institutional ownership increase stock return volatility? Evidence from Vietnam," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 54-61.

    More about this item

    Keywords

    Institutional investor; Herding; Information asymmetry; International financial markets;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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