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Herding Behavior and Stock Returns: An Exploratory Investigation

  • Lillyn L. Teh
  • Werner F. M. de Bondt
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    We collect trading and ownership statistics for U.S. stocks between 1970 and 1989 and we study the cross-section of returns. In rational and frictionless markets, equity returns should not depend on asset turnover nor should they depend on owner identity. Yet, with market imperfections, crowd behavior may affect returns. We examine two types of herding: (i) conventional investing, and (ii) trading for non-informational reasons. Incomplete information models predict that conventional stocks command higher prices. Noise trader models predict that shares that are traded for non-informational reasons are more risky and sell for lower prices. We find evidence that supports both predictions, even if we control for beta, firm size, and the book-to-market ratio.

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    File URL: http://www.sjes.ch/papers/1997-II-11.pdf
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    Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

    Volume (Year): 133 (1997)
    Issue (Month): II (June)
    Pages: 293-324

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    Handle: RePEc:ses:arsjes:1997-ii-11
    Contact details of provider: Postal:
    c/o SNB/BNS, Börsenstrasse 15, PO Box 2800, CH-8022 Zürich

    Phone: +41 (0)44 631 32 34
    Fax: +41 (0)44 631 39 01
    Web page: http://www.sjes.ch
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    1. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
    2. Hardouvelis, Gikas A, 1990. "Margin Requirements, Volatility, and the Transitory Components of Stock Prices," American Economic Review, American Economic Association, vol. 80(4), pages 736-62, September.
    3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
    4. Paul H. Kupiec & Steven A. Sharpe, 1989. "Animal spirits, margin requirements, and stock price volatility," Finance and Economics Discussion Series 91, Board of Governors of the Federal Reserve System (U.S.).
    5. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    6. Hart, Oliver D. & Kreps, David M., 1986. "Price Destabilizing Speculation," Scholarly Articles 3448679, Harvard University Department of Economics.
    7. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    8. Lee, Charles & Shleifer, Andrei & Thaler, Richard H., 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Scholarly Articles 27693394, Harvard University Department of Economics.
    9. Pagano, Marco, 1986. "Endogenous Market Thinness and Stock Price Volatility," CEPR Discussion Papers 146, C.E.P.R. Discussion Papers.
    10. Gregory R. Duffee, 1992. "Trading volume and return reversals," Finance and Economics Discussion Series 192, Board of Governors of the Federal Reserve System (U.S.).
    11. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
    12. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    13. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
    14. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January.
    15. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    16. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-37, July.
    17. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Scholarly Articles 27693805, Harvard University Department of Economics.
    18. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    19. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    20. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
    21. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
    22. Shiller, 021Robert J. & Pound, John, 1989. "Survey evidence on diffusion of interest and information among investors," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 47-66, August.
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