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Journal of Economics and Finance

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25-07-2017

Mutual fund herding and reputational concerns

Authors: Marius Popescu, Zhaojin Xu

Published in: Journal of Economics and Finance | Issue 3/2018

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Abstract

The article examines whether mutual fund managers’ career concerns contribute to their herding behavior. We find that mutual funds herd, on average, 71% more in down markets than in up markets. Furthermore, we find that poorly performing funds herd, on average, 17% more than well performing funds, and that this pattern is the result of poorly performing funds that herd, on average, 110% more in down markets relative to up markets. Our evidence is consistent with the argument that poorly performing managers have stronger career concerns, and particularly so in down markets.

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see Sias (2004); Puckett and Yan (2008).

see Choi and Sias (2009); Gavriilidis, Kallinterakis, and Leite-Ferreira (2013); Celiker, Chowdhury, and Sonaer (2015).

see Choe, Kho, and Stulz (1999); Chang, Cheng, and Khorana (2000); Kim and Nofsinger (2005); Holmes et al. (2013); Choi and Skiba (2015); Voronkova and Bohl (2005).

For models of reputational concerns, see Scharfstein and Stein (1990); Trueman (1994); Graham (1999). For models of style trading strategies, see Barberis and Shleifer (2003). For models of investigative herding, see Froot, Scharfstein, and Stein (1992); Hirshleifer, Subrahmanyam, and Titman (1994). For models of information cascades, see Banerjee (1992); Bikhchandani, Hirshleifer, and Welch (1992); Welch (1992); Avery and Zemsky (1998); Lee (1998); Cipriani and Guarino (2014).

Hirshleifer and Teoh (2003) provide an extensive review on theory and empirical evidence on herding.

Wermers (1999) and Sias (2004) document short-term return continuation following institutional herding. Puckett and Yan (2008) find evidence of return reversals after short-term sell herds. Gutierrez and Kelley (2009) provide evidence of reversals after institutional buy herding measured over one quarter. Dasgupta, Prat, and Verardo (2011) document long-term return reversals after institutional herding. Brown, Wei and Wermers (2014) find that stocks traded by career-concerned herds of fund managers in response to analyst recommendation changes experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Koch (2016) finds that herding and following managers tend to maintain similar portfolio holdings levels but they do not outperform.

The methodology requires two consecutive quarters to estimate the level of herding, so the final number of quarters in our analysis decreases from 122 to 120.

We also perform our analysis with funds classified as buyers (sellers) of a stock if they only increase share ownership. The results are qualitatively similar.

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Title: Mutual fund herding and reputational concerns
Authors: Marius Popescu
Zhaojin Xu
Publication date: 25-07-2017
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 3/2018
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-017-9405-y

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