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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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    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, B├Ârsenstrasse 15, PO Box 2800, CH-8022 Z├╝rich
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    Web page: http://www.sjes.ch
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    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
    2. 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.
    3. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics And The Role Of Feedback Traders," Working papers 545, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. 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.
    5. Kupiec, Paul H & Sharpe, Steven A, 1991. " Animal Spirits, Margin Requirements, and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 46(2), pages 717-31, June.
    6. Pagano, Marco, 1986. "Endogenous Market Thinness and Stock Price Volatility," CEPR Discussion Papers 146, C.E.P.R. Discussion Papers.
    7. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
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    9. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
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    13. 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.
    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. 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.
    16. 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.).
    17. 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.
    18. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    19. 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.
    20. 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.
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