An Evaluation of the Causes, Extent, and Initiators of Herding Behavior

Abstract

The existence of investor herding behavior has been documented in many studies. In this study the causes and extent of investor herding behavior for DOW firms is analyzed for the years 2007 to 2011. Herding starts with influential investment initiators who attract early imitators, who in turn attract later imitators. In particular, the role of the industry outlook, the financial performance of the firm, and the characteristics of the initiators of the herding process are examined. Our results show that investor herding behavior has increased, and is highest with firms in rapidly growing or declining industries and with highly successful or weak earnings performance. Two key initiators of the herding process were found to be legal insiders and activist investors. These findings provide significant insights with respect to investment strategies.