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Do fund managers herd to counter investor sentiment?

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  • Liao, Tsai-Ling
  • Huang, Chih-Jen
  • Wu, Chieh-Yuan

Abstract

Extensive literature conjectures that investor sentiment may be one of the important factors in explaining fund manager herding. To address this issue, this study investigates the role of investor sentiment in fund manager herding. The study employs the trinomial-distribution approach to measure manager herding, and uses the principal component analysis as the means of extracting the composite sentiment measure. The results indicate that investor sentiment plays a significant role in explaining subsequent mutual fund herding, especially on the sell-side. Specifically, the evidence is consistent with the funds sharing an aversion to stocks that have previously exhibited higher optimistic sentiment, supporting the sentiment countering hypothesis. The finding also reveals the existence of informational cascades in the case that fund managers herd as a result of analyzing the same sentiment-related indicators.

Suggested Citation

  • Liao, Tsai-Ling & Huang, Chih-Jen & Wu, Chieh-Yuan, 2011. "Do fund managers herd to counter investor sentiment?," Journal of Business Research, Elsevier, vol. 64(2), pages 207-212, February.
  • Handle: RePEc:eee:jbrese:v:64:y:2011:i:2:p:207-212
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yang, Chunpeng & Zhang, Rengui, 2014. "Dynamic sentiment asset pricing model," Economic Modelling, Elsevier, vol. 37(C), pages 362-367.
    2. Yang, Chunpeng & Zhang, Rengui, 2013. "Sentiment asset pricing model with consumption," Economic Modelling, Elsevier, vol. 30(C), pages 462-467.
    3. Hao Fang & Yang-Cheng Lu & Hwey-Yun Yau, 2014. "The Effects of Stock Characteristics on the Direction and Extent of Herding by Foreign Institutional Investors in the Taiwan Stock Exchange," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2S), pages 60-74, March.
    4. Yang, Chunpeng & Zhou, Liyun, 2015. "Investor trading behavior, investor sentiment and asset prices," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 42-62.
    5. Gavriilidis, Konstantinos & Kallinterakis, Vasileios & Tsalavoutas, Ioannis, 2016. "Investor mood, herding and the Ramadan effect," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 23-38.
    6. Celiker, Umut & Chowdhury, Jaideep & Sonaer, Gokhan, 2015. "Do mutual funds herd in industries?," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 1-16.
    7. repec:pal:assmgt:v:18:y:2017:i:4:d:10.1057_s41260-016-0032-5 is not listed on IDEAS
    8. Yang, Chunpeng & Zhou, Liyun, 2016. "Individual stock crowded trades, individual stock investor sentiment and excess returns," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 39-53.
    9. 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.
    10. repec:eee:reveco:v:49:y:2017:i:c:p:353-369 is not listed on IDEAS
    11. Economou, Fotini & Gavriilidis, Konstantinos & Kallinterakis, Vasileios & Yordanov, Nikolay, 2015. "Do fund managers herd in frontier markets — and why?," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 76-87.
    12. Huang, Teng-Ching & Lin, Bing-Huei & Yang, Tung-Hsiao, 2015. "Herd behavior and idiosyncratic volatility," Journal of Business Research, Elsevier, vol. 68(4), pages 763-770.
    13. Huang, Teng-Ching & Wu, Ching-Chih & Lin, Bing-Huei, 2016. "Institutional herding and risk–return relationship," Journal of Business Research, Elsevier, vol. 69(6), pages 2073-2080.
    14. Yang, Chunpeng & Zhang, Rengui, 2013. "Dynamic asset pricing model with heterogeneous sentiments," Economic Modelling, Elsevier, vol. 33(C), pages 248-253.
    15. Chung Baek, 2016. "Stock prices, dividends, earnings, and investor sentiment," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1043-1061, November.
    16. Guney, Yilmaz & Kallinterakis, Vasileios & Komba, Gabriel, 2017. "Herding in frontier markets: Evidence from African stock exchanges," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 152-175.

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