Journal of Banking & Finance 50 (2015) 589–598

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Journal of Banking & Finance

journal homepage: www.elsevier.com/locate/jbf

Herding on fundamental information: A comparative study

Emilios C. Galariotis a, Wu Rong b, Spyros I. Spyrou c,⇑
a
Audencia Nantes School of Management, Centre for Financial and Risk Management, Nantes, France
b
Seaview Pharmacy Ltd., Isle of Wight, UK
c
Athens University of Economics & Business, Athens, Greece

a r t i c l e i n f o a b s t r a c t

Article history: This paper tests for herding towards the market consensus for US and UK leading stocks, and to the best
Received 9 August 2013 of our knowledge addresses a gap in the literature regarding the importance of major fundamental mac-
Accepted 10 March 2014 roeconomic announcements. The results indicate that US investors tend to herd during days when impor-
Available online 19 March 2014
tant macro data are released, and that there have been herding spill-over effects from the US to the UK
during earlier financial crises. Further results reveal more differences in herding behavior between the
JEL classification: two markets: in the US we find that investors herd due to both fundamentals and non-fundamentals dur-
G15
ing different crises, when in the UK there is herding only due to fundamentals and only during the Dot-
Keywords: com bubble burst. These results suggest that the drivers of herding behavior are period and country
Herding specific.
Fundamental information Ó 2014 Elsevier B.V. All rights reserved.
Financial crisis

1. Introduction paper contributes to the literature in a number of ways. Firstly,

In financial markets herding indicates the process where mar-
ket participants contemporaneously trade in the same direction
and/or their behavior converges to the consensus. The reasons for
herd behavior are diverse. For example, analysts may herd to pro-
tect reputation, institutional investors may herd to protect remu-
neration, and investors may infer information from the actions of
previous investors or react to the arrival of fundamental informa-
tion. Bikhchandani and Sharma (2000) make a distinction between
investors who face a similar information set driven by fundamen-
tals (‘‘spurious’’ herding) and investors who intentionally copy the
behavior of others (‘‘intentional’’ herding). Generally speaking,
there are two main strands in the related empirical literature. On
the one hand there are empirical papers that concentrate on insti-
tutional investor herding (e.g. Lakonishok et al., 1992), while on
the other hand there are studies that use aggregate market data
and investigate herding towards the market consensus (e.g.
Chang et al., 2000).
This paper falls within the latter strand and tests for herding
towards the market consensus for US and UK leading stocks. The
⇑ Corresponding author. Address: Athens University of Economics and Business,
Department of Accounting and Finance, Patision 76, 10434 Athens, Greece. Tel.: +30
210 8202169.
E-mail addresses: egalariotis@audencia.com (E.C. Galariotis), wu.rong@seaview-
pharmacy.co.uk (W. Rong), sspyrou@aueb.gr (S.I. Spyrou).
we address a gap in the literature and test for herding when impor-
tant fundamental macroeconomic information is released. It is the
first time, to the best of our knowledge, that this issue is addressed
in the literature. Previous studies tend to concentrate on days
when the market is up or down in order to test for asymmetric
herding effects and ignore days with informational events. In this
paper we employ announcement dates for important macroeco-
nomic events such as changes in the US federal funds rate, changes
in the Bank of England base rate, days when news are released
about macroeconomic indicators (e.g. gross domestic product,
unemployment, trade balance, inflation rate, consumer confidence,
etc.). If investors take similar decisions because they face a similar
fundamental-driven information set, or if macro trading is preva-
lent, then days when important macro data are released or days
when a rate change takes place may induce investor to react in a
similar manner. This paper contributes to the literature on macro
announcements and its effect on asset valuation and makes an
attempt to reconcile it with the herding literature. More specifi-
cally, our results are consistent with the notion that macroeco-
nomic news significantly influence investor behavior; we report
statistically significant evidence of herding towards the consensus
in US stock prices during days when important US macroeconomic
information is released. This pattern persists irrespective of invest-
ment style (value vs. growth, large vs. small).
The hypothesis that the release of macro information may have
an impact on investor behavior is supported by the findings of

http://dx.doi.org/10.1016/j.jbankfin.2014.03.014
0378-4266/Ó 2014 Elsevier B.V. All rights reserved.
590 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598
earlier empirical studies that report a direct link between macro
news and asset prices and volatility. For example, Ederington and
Lee (1993) find that macro news releases are responsible for most
of the observed volatility patterns in the US interest rate and for-
eign exchange futures markets; while Fleming and Remolona
(1999) argue that macroeconomic information announcements
trigger a two-stage adjustment process in the U.S. treasury market.
They suggest that a very short-term initial price change is followed
by a prolonged period with rising trading volume and volatility
persistence as market participants attempt to reconcile residual
differences in their private views. More recent studies come to
similar conclusions: Bollerslev et al. (2000) report that regularly
scheduled macroeconomic announcements are a significant source
of intraday volatility for fixed income securities and that volatility
dependencies may have a long-memory, while Nikkinen and
Sahlström (2004) report that investors in US stocks regard the
scheduled Federal Open Market Committee meetings as highly sig-
nificant for stock valuation and that macro announcements (such
as the employment report or news on CPI) have a large impact
on uncertainty (see also, Graham et al., 2003). Beber and Brandt
(2006) investigate the impact of macro releases on the forward-
looking beliefs and preferences of investors in US bond markets
and find that announcements reduce uncertainty, while Boyd
et al. (2005) argue that news about employment is important
information for stock valuation, related to information about
future interest rates, the equity risk premium, and corporate earn-
ings. Rangel (2011) shows that macroeconomic surprises have a
significant effect on equity volatility with some surprises (such
as inflation shocks) having a persistent effect and others (such as
monetary policy and employment shocks) shorter term impact.
Evans (2011) finds that around one third of jumps in US futures
markets correspond to US macroeconomic news announcements
and that news-related jumps show higher volatility persistence
and jump clustering, among other things.
Secondly, we augment commonly used testing methodologies in
order to investigate further whether herding is due to common
reaction to fundamental information or due to intent. Only
recently researchers have turned their attention to the issue of
‘‘spurious’’ vs. ‘‘intentional’’ herding, and mainly for institutional
investor herding. For example, Holmes et al. (2013) find that insti-
tutional herding in Portugal is intentional rather than spurious and
due to reputational reasons. Here, we use well known return fac-
tors to capture relevant fundamental information and to decom-
pose cross-sectional return deviations to deviations due to
reaction to fundamental information and deviations due to intent.
More specifically, we first hypothesize that size, book-to-market,
and momentum (Fama and French, 1995, 1996; Carhart, 1997)
reflect changes in common risk factors relevant to stock valuation.
We then estimate a regression where the dependent variable is
return deviations from the consensus and the explanatory vari-
ables are related to the above factors and the excess returns of
the market. We use the residuals from this regression as a proxy
for return deviations due to non-fundamental information. We find
that during earlier crises US investors tend to herd due to reaction
to fundamentals while during the recent Subprime crisis herding is
due to responses to non-fundamental information. UK investors
seem to herd only during the Dotcom bubble burst, reacting to fun-
damental information. We explain these based on a number of dif-
ferences between the two markets that are discussed below.
Thirdly, there is a relative gap in the literature as regards to ana-
lytical results on herding towards the average for the UK market,
especially during the recent period. For example, previous studies
on the UK market do not employ market data but tend to use data
either for fund managers (Wylie, 2005) or analysts (De Bondt and
Forbes, 1999). Also, we compare results for two of the most impor-
tant equity markets in the world (US and UK) and test whether
herding behavior in one market is affected from events that take
place in the other market (see Klein, 2013). We document impor-
tant herding behavior differences between the two markets, that
can be explained by institutional characteristics. For example, in
the UK (US) institutional (individual) investors are the largest cat-
egory of shareholders; in the UK (US) there are (not) informal coali-
tions of institutional investors; in the UK (US) there are low (high)
legal barriers against activism; in the UK there are no legal restric-
tions on stock ownership; UK managers do not have the same free-
dom as US managers to mount takeover defenses (see, among
others, Faccio and Lasfer, 1999; Franks and Mayer, 1997; Short
and Keasey, 1999). Other differences regarding corporate gover-
nance are that pre-emption rights are a fundamental shareholder
right in the UK while they are not very common in the US, and that
a shareholder-led approach is adopted in the UK as opposed to a
regulator-led approach in the US. Financial reporting is considered
more complex and rules-based in the US compared to principles-
based in the UK.1 In addition, board directors in the UK are respon-
sible for the company and are accountable to shareholders, while in
the US shareholders have little influence on board composition (with
few exceptions); shareholding is concentrated among fewer institu-
tional investors in the UK compared to the US.2 Due to differences in
regulation between the two markets we may also expect a different
pattern of trading by informed investors (Fidrmuc et al., 2006), while
Kyriacou et al. (2008) argue that due to differences in regulation, tax-
ation, executive remuneration, and shareholder practices in option
trading there is also a disparity in informed executive option trading
between the two markets.
Fourthly, we examine whether investment style (value vs.
growth; large vs. small) plays a role in herding behavior and, since
previous studies indicate that herding is more probable to take
place during periods of extreme market swings, we isolate signifi-
cant periods of volatility, such as the Peso Crisis, the Asian Crisis,
the Russian Crisis, the Dotcom bubble burst, and the Subprime Cri-
sis, to examine whether the driving forces behind herding are sta-
ble over-time. We document differences between crises. For
example, we find that during the Asian and the Russian crises US
investors herd due to common reaction to fundamental informa-
tion while during the Subprime crisis herding is due to non-funda-
mental information. We also find herding spillovers effects from
the US to the UK during the Asian crisis and the Dotcom bubble
burst. These results are consistent with the differences mentioned
earlier between the two markets and suggest that the drivers of
herding behavior are not only country but also period specific.
These findings have implications for both theory and empirical
studies. Firstly, the nature of economic agent’s herding behavior
may vary during different time periods. For instance, the results
indicate that market participants in the US trade in the same direc-
tion for various periods as a reaction to the arrival of fundamental
economic information. During the recent crisis, however, they
seem to intentionally copy each other’s actions. This behavior has
perhaps intensified the impact of the crisis since, as
Bikhchandani and Sharma (2000) argue, intentional herding may
also lead to fragile markets, excess volatility and systemic risk.
The implication here is that economic agents may herd for differ-
ent reasons depending on the state of the world, and thus theoret-
ical models that attempt to describe this behavior may need to take
this finding into account. This finding is consistent with the argu-
ment of Baddeley (2010) who suggests that herd behavior may
be the result of an interaction of cognitive and emotional factors
and calls for interdisciplinary attempts to study herding. Secondly,
1
See for details: ‘‘Pressure Points: Contrasting US and UK securities markets: How
they impact international policy, investment, business and accounting’’. The Institute
of Chartered Accountants of England and Wales, http://www.icaew.com.
2
See for details: accountancymagazine.com, February 2007, page 111–112.
 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598
the findings indicate differences between markets, and emphasize
the importance of the sample periods chosen for empirical studies.
Note that when the full sample is used no herding is detected;
when sub-samples or the decomposition of deviations is used we
come to different conclusions. The rest of the paper is organized
as follows: Section 2 briefly reviews the relevant literature, Sec-
tion 3 presents the data and the testing methodologies, Section 4,
presents the results, and Section 5 concludses the paper.
2. Herding in financial markets: a short review
What drives herding behavior? The relevant theoretical litera-
ture can be divided in two broad categories: models that assume
rational or near-rational agents and models that assume irrational
agents.3 For example, Scharfstein and Stein (1990) suggest that in
labor markets with no perfect information reputation concerns
may lead managers to follow each other; in other words, concern
for reputation may lead to rational herd behavior that can be
thought of as insurance against underperformance (see also Rajan,
2006). Similarly, analysts may have the tendency to forecast earn-
ings similar to those announced by previous analysts in an attempt
to copy higher ability, protect reputation, or hide low ability
(Trueman, 1994; Graham, 1999). Froot et al. (1992) also show that
speculators with short horizons may herd in an attempt to discover
what other informed investors know. Bikhchandani et al. (1992)
argue that it may be optimal for individuals to disregard their own
private information and follow the observable actions of individuals
before them, infering that previous investors possess important pri-
vate information (see also, Welch, 1992). These informational cas-
cades can influence rational individuals and lead to the creation of
bubbles (Banerjee, 1992). Avery and Zemsky (1998) argue that if
complicated information structures are assumed, then herding of
this type is possible (see also Cipriani and Guarino, 2005).
The results of other studies indicate that bubble-like phenom-
ena and herd behavior may be the result of irrational investors
or the consequence of psychological stimuli. For instance, social
conventions affect investors and lead them to imitate the actions
of others during periods of uncertainty (Keynes, 1936). Shleifer
and Summers (1990) distinguish between arbitrageurs who are
fully rational and irrational investors whose trading behavior suf-
fers from systematic biases, and argue that often investor demand
for assets and changes in investor sentiment may not be justified
by fundamentals (see also, DeLong et al., 1991). Tedeschi et al.
(2012) show that when herding is profitable, market participants
have an incentive to imitate and a desire to be imitated, and also
that, when herding is high and noise traders populate the market,
intelligent market participants cannot enter this market. Other
models suggest that investor sentiment may lead to investor over-
reaction and/or underreaction (Barberis et al., 1998), or that inves-
tors are overconfident and suffer from biased self-attribution
(Daniel et al., 1998).
The empirical tools employed to examine herd behavior in
financial markets may also be broadly classified in one of two cat-
egories: methodologies that aim at detecting institutional investor
and analyst herding using micro-data (Lakonishok et al., 1992; Sias,
2004, among others) and methodologies that investigate herding
towards the market average and rely on aggregate market data
(Christie and Huang, 1995; Chang et al., 2000). The empirical
3
See Devenow and Welch (1996) for a discussion on rational herding models.
According to Devenow and Welch (1996) herding may be theoretically approached
either from a non-rational point of view (e.g. investors do not engage in rational
analysis and follow one another blindly), a rational point of view (e.g. herding stems
from payoff externalities and optimal decision-making being distorted by issues such
as information asymmetry), or a near-rational view (e.g. investors may use heuristic
rules). For a recent literature review see also Spyrou (2013).
591
results are mixed. For example, on the one hand, Lakonishok
et al. (1992), Grinblatt et al. (1995), Wermers (1999) find limited
evidence of herding for US pension and mutual fund managers,
although they do find some evidence of herding for smaller stocks.
On the other hand, Sias (2004) finds that institutional investors
tend to follow each other in buying and selling the same securities
and their own lag trades, while Choi and Sias (2009) come to sim-
ilar conclusions with regard to institutional industry herding.
Recent studies that examine international markets report that UK
equity fund manager herding is modest (Wylie, 2005), that the
level of institutional herding in Japan is lower than the US (Kim
and Nofsinger, 2005), and that German mutual fund managers herd
as well (Walter and Weber, 2006).
Other studies use aggregate market data and examine herding
towards the consensus, also with mixed results. For example,
Christie and Huang (1995) employ the cross-sectional standard
deviation of returns to capture herding and do not find evidence
consistent with herd behavior; Gleason et al. (2004) use data on
nine sector Exchange Traded Funds (ETFs) traded on the American
Stock Exchange and find no ETF investor herding during periods of
extreme market swings. Hwang and Salmon (2004), however,
employ a similar approach and find evidence consistent with herd-
ing for the US and South Korean equity markets; while Chang et al.
(2000) find significant evidence of herding for South Korea and Tai-
wan and (to a lesser extend) Japan, and no evidence for the US and
Hong Kong. For the markets that do exhibit herding, the authors
report that macroeconomic information ‘‘tends to play a greater
role in the decision making process of market participants’’ (p.
1677). Recently, Chiang and Zheng (2010) examine 18 markets
and find evidence of herd behavior in many advanced stock mar-
kets and Asian markets, but no evidence of herding for the US
and the Latin American markets. Klein (2013) examines whether
herding is time varying and reports that, on average, during peri-
ods of turmoil asset prices are much more likely to be driven by
behavioral effects. Economou et al. (2011) find evidence consistent
with herding and cross market herding in Southern Europe.
3. Data and testing methodology
For the empirical analysis we use daily prices for all S&P100 and
FTSE100 constituent stocks between October 1989 and April 2011
(UK data start January 1991). The S&P 100 index is a subset of the
S&P 500 index and includes 100 leading US stocks with exchange-
listed options and with an average adjusted Market Cap of approx-
imately 74.56 $ billion (as of January 2012, www.standardandpo-
ors.com); the constituent stocks represent approximately 45% of
the market capitalization of the US equity markets. The FTSE 100
includes UK stocks with the highest market capitalization, repre-
senting approximately 80% of the UK total equity market capitali-
zation and is a subset of the FTSE 350 index (http://www.ftse.com).
Returns are defined as the first difference of the logarithmic price
levels.
In order to examine whether there are differences in herd
behavior towards different investment styles we sort stocks for
each market in four different sub-samples based on the Book-to-
Market ratio (B/M) and market capitalization (MV). For example,
previous studies indicate that herding is more pronounced in smal-
ler capitalization stocks (Lakonishok et al., 1992; and Wermers,
1999; among others). More specifically, each sample year all stocks
are ranked on their B/M (MV) ratio and are assigned to a High B/M
(High MV) sub-sample to create a portfolio of ‘‘value’’ (‘‘large’’)
stocks and a Low B/M (Low MV) to create a portfolio of ‘‘growth’’
(‘‘small’’) stocks. Since the S&P100 and the FTSE100 index contain
the largest stocks in the US and UK markets, one may argue that
sorting stocks on market capitalization to obtain ‘‘small’’ and
592 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598

‘‘large’’ stocks may add little to the analysis. Note, however, that
there is a large dispersion in market values in both markets. For
instance, for the US sample the largest constituent stock has a mar-
ket capitalization of 417.15 $ billion while the smallest one has a
market capitalization of 7.01 $ billion (as of January 2012).4 All data
are obtained from Thomson Reuters DataStream International.
Since previous studies indicate that herding is more probable to
take place during periods of extreme market swings, we isolate sig-
nificant periods of volatility, such as the Peso Crisis, the Asian Cri-
sis, the Russian Crisis, the Dotcom bubble burst, and the Subprime
Crisis, and examine whether the driving forces behind herding are
stable over-time. More specifically, the sub-periods examined for
the purposes of this paper are as follows: the Peso Crisis refers to
the period between December 1994 and July 1995; the Asian Crisis Fig. 1. Cross Sectional Absolute Deviation (CSAD) for the US market (1989–2011).
refers to the period between July 1997 and March 1998; the Rus-
sian Crisis refers to the period between August 1998 and March
1999; the Dotcom bubble burst refers to the period between Janu-
ary 2000 and June 2000; and the Subprime Crisis refers to the per-
iod between January 2008 and April 2011.5 We also split the sample
to days with a positive market return (‘‘up’’ days) and days with a
negative market return (‘‘down’’ days) in order to examine whether
the degree of herding behavior is asymmetric in rising and falling
markets.
A common measure of herd behavior in studies that attempt to
estimate herding towards the market consensus is the cross-sec-
tional standard deviation of returns proposed by Christie and
Huang (1995). They argue that when individual returns herd
around the market consensus, return dispersions should be rela-
tively low. By contrast, when stocks differ in their sensitivity to
market movements, rational asset pricing suggests that dispersions Fig. 2. Cross Sectional Absolute Deviation (CSAD) for the UK market (1991–2011).

will increase (see also, Hwang and Salmon, 2004). Chang et al.
(2000) suggest that if investors tend to follow aggregate market
behavior during periods of large average price movements then
the linear and increasing relation between dispersion and market
return will no longer hold and it can become non-linearly increas-
ing or even decreasing. They suggest a non-linear regression spec-
ification to estimate the relation between the Cross-Sectional
Absolute Deviation of returns and the market return. We adopt this
approach to detect herding activity. More specifically, for each
stock i of the N stocks and for each day t the difference of the
stock’s return (Rit) and the market return (Rmt) is first calculated,
and then the Cross Sectional Absolute Deviation (CSAD) is esti-
mated as in (1):
1X N
CSADt ¼ jRi;t  Rm;t j ð1Þ
N i¼1
The evolution over time of this measure is presented in Fig. 1 (US
market) and Fig. 2 (UK market). In general terms, the CSAD measure
is relatively stable over-time with two notable exceptions where
deviations from the market consensus are significantly increasing:
the burst of the Dotcom bubble (1999–2001) and the Subprime cri-
sis (2007–2008).
Then, a non-linear (OLS) regression is estimated as in (2):
4
A similar case can be made for the FTSE100 Index: as of March 2013, Royal Dutch
Shell had a market capitalization of 135 $ billion while Vedanta Resources had a
market capitalization of approximately 1.2 $ billion.
5
Although many elements of the crisis were visible during 2007, all major events
took place in 2008: in March Bear Stearns collapsed; in September Lehman Brothers
failed, Merrill Lynch was purchased by Bank of America, Goldman Sachs and Morgan
Stanley were allowed access to emergency lines of credit from the Federal Reserve,
Fannie Mae and Freddie Mac were taken over by the government, and insurance
company AIG could not meet its commitments. Thus, for empirical estimations we
use as the start of the crisis January 2008. However, since previous studies use other
start dates we repeated the tests setting the start date in late 2007 (e.g. November
when Bear Stearns reported the first quarterly loss in its history; or August as in
Beltrattia and Stulz (2012)). The results are qualitatively the same.
CSADt ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et ð2Þ
As Chang et al. (2000) argue, in the case of herding the coeffi-
cient on the non-linear term will be negative and statistically
significant.6
As discussed in the introduction, a pivotal issue is whether
investors tend to herd on days when an important macroeconomic
announcement takes place. In order to investigate this issue we
augment Eq. (2) as follows:
CSADi;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ b3 DUM t R2m;t þ et ð3Þ
In (3), DUM denotes a dummy variable that takes the value of one
on a day when an important macroeconomic information
announcement takes place and zero otherwise. For DUM we employ
release dates on important macroeconomic news such as changes in
the US federal funds rate, changes in the Bank of England base rate,
days where news are released about items such as flow of funds,
balance sheets, integrated macroeconomic accounts, unemploy-
ment, inflation rate, consumer confidence, among others.7 If macro-
economic news announcements induce herding behavior the
coefficient on the dummy variable should be negative and statisti-
cally significant.
We next examine whether herding behavior in one market is
affected from events that take place in another market (see Klein,
2013), since spill-over effects could explain the differences found
6
We use OLS for the empirical estimations as in previous studies (e.g. see Hwang
and Salmon, 2004). In order to test the robustness of our results, however, we also
employed two different procedures: the Two-Stage Least Squares (TSNL) and the
Generalized Method of Moments (GMM). The results are qualitatively the same, thus
we report the OLS results here.
7
Sources: U.S. Bureau of Economic Analysis (BEA), Federal Reserve Statistical
Release (Financial Accounts of the United States: Flow of Funds, Balance Sheets, and
Integrated Macroeconomic Accounts), Office for National Statistics (ONS, UK); and
Bank of England.
 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598 593

Table 1
Testing for herding towards the average.

Sample Panel A: US results Panel B: UK results

b0 t-Statistic b1 t-Statistic b2 t-Statistic b0 t-Statistic b1 t-Statistic b2 t-Statistic
Full sample
All days 0.01 114.90 0.38 32.58 1.69 7.38 0.02 151.61 0.33 15.72 4.01 8.88
Down days (Rm < 0) 0.01 79.82 0.34 19.81 2.10 6.27 0.02 110.95 0.24 8.15 3.84 5.99
Up days (Rm > 0) 0.01 82.70 0.42 26.35 1.35 4.32 0.02 105.28 0.43 14.56 4.17 6.68
Large stocks (high MV stocks)
All days 0.01 99.52 0.35 29.19 0.82 3.53 0.01 102.99 0.36 19.04 2.24 5.52
Down days (Rm < 0) 0.01 70.40 0.31 18.03 1.01 3.01 0.01 79.75 0.31 12.20 2.41 4.41
Up days (Rm > 0) 0.01 70.48 0.38 23.35 0.71 2.18 0.01 67.60 0.42 14.88 2.10 3.54
Smaller stocks (low MV stocks)
All days 0.01 115.27 0.41 31.77 2.57 10.11 0.03 150.65 0.30 10.23 5.78 9.16
Down days (Rm < 0) 0.01 78.89 0.37 19.06 3.20 8.49 0.03 108.42 0.17 4.16 5.28 5.79
Up days (Rm > 0) 0.01 84.17 0.45 25.96 2.00 5.86 0.03 106.53 0.44 10.89 6.23 7.29
Growth stocks (low B/M stocks)
All days 0.01 109.38 0.35 29.21 1.50 6.49 0.02 132.08 0.33 15.92 2.80 6.31
Down days (Rm < 0) 0.01 77.21 0.30 17.86 1.80 5.38 0.02 92.94 0.25 8.28 3.16 4.81
Up days (Rm > 0) 0.01 77.60 0.38 23.52 1.28 3.99 0.02 94.29 0.41 14.61 2.49 4.18
Value stocks (high B/M stocks)
All days 0.01 100.01 0.40 29.19 1.73 6.47 0.02 130.77 0.32 12.67 5.30 9.77
Down days (Rm < 0) 0.01 69.01 0.35 17.33 2.34 5.92 0.02 94.75 0.22 6.29 4.85 6.23
Up days (Rm > 0) 0.01 72.43 0.44 24.05 1.20 3.32 0.02 91.45 0.42 12.11 5.70 7.68

Notes: The table presents OLS results for the full period sample for the following non-linear regression: CSADt ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et , where CSAD is the Cross Sectional
Absolute Deviation and Rm;t is the market return. For the US the market portfolio is the S&P 100, while for the UK market the market portfolio is the FTSE100. ‘‘Down days’’
refers to days when the market portfolio has a negative return (Rm < 0) and ‘‘Up days’’ refers to days when the market portfolio has a positive return (Rm > 0). Full sample
period for the US: 02/10/1989-29/04/2011. Full sample period for the UK: 01/01/1991-29/04/2011. A negative and statistically coefficient b2 implies herding towards the
consensus.

in the two markets. For example, Chiang and Zheng (2010) find
that events in the US market help explain herding behavior in
other markets. In order to explore this issue further, we follow a
process similar to that of Chiang and Zheng (2010), i.e. we insert
an extra term (the squared market return for the other market)
in regression (2). More specifically, we estimate regressions (4)
and (5) bellow. In the case of spill-over herding effects the coeffi-
cient(s) b3 should be negative and statistically significant.
CSADUK;i;t ¼ b0 þ b1 jRUK;t j þ b2 R2UK;t þ b3 R2US;t þ et
CSADUS;i;t ¼ b0 þ b1 jRUS;t j þ b2 R2US;t þ b3 R2UK;t þ et
both the CSAD and the factors are in return form, the residuals from
(6) can be thought of as the cross sectional deviations with the
effect of fundamental information removed. In other words, we
can think of this term as a measure of clustering due to investors
responding to non-fundamental information. We denote this term
as CSADNONFUND:
CSADNONFUND;t ¼ t ð7Þ
It follows that the difference between the total CSAD and the
ð4Þ CSADNONFUND are the deviations due to investor reaction to changes
in fundamental information. We term these deviations as
ð5Þ CSADFUND:

Bikhchandani and Sharma (2000) argue that investors may take CSADFUND;t ¼ CSADt  CSADNONFUND;t ð8Þ
similar decisions due to the fact that they react to the same changes
We can think of CSADFUND as a measure of clustering due to
in fundamental information. They term this type of herding as ‘‘spu- investors responding to fundamental information. This way, we
rious’’ as opposed to ‘‘intentional’’ herding where investors may
are able to separate deviations due to fundamental information
copy each other actions with intent. In order to explore this issue (CSADFUND) and use them to test for ‘‘spurious’’ herding; and devi-
further, we decompose the CSAD measure to deviations due to reac-
ations due to other reasons (CSADNONFUND) and use them to proxy
tion to common fundamental factors and deviations due to non- for ‘‘intentional’’ herding. That is, we estimate a regression similar
fundamental information. We do this by hypothesizing that return
to Eq. (2) but with each of the above defined CSAD measures as
factors such as the ones in Fama and French (1995, 1996) and
dependent variables:
Carhart (1997) capture adequately important fundamental informa-
tion that may affect investor decisions on a market level.8 We then CSADFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et ð9Þ
estimate a regression of the total CSAD as follows:

CSADt ¼ b0 þ b1 ðRm;t  RF Þ þ b2 HMLt þ b3 SMBt þ b4 MOMt þ t CSADNONFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et ð10Þ

ð6Þ
In (6), HML is the High Minus Low return factor, SMB is the Small
Minus Big return factor, and MOM is the Momentum factor. Since
8
This is not an unsupported hypothesis. For instance, Liew and Vassalou (2000)
find that the High Minus Low (HML) and the Small Minus Big (SMB) factors contain
significant information about future Gross Domestic Product (GDP) growth in the US
and nine international markets. Gregory et al. (2003) report a positive correlation
between HML and future GDP growth for the UK market. Similarly, a strong link
between momentum and the macro economy is established by Kessler and Scherer
(2010).
Regressions (9) and (10) are estimated for both the US and the UK
market for the full sample period and the sub-periods and for all
style portfolios. In the case of herding the coefficient on the squared
term should be negative and statistically significant.
4. Results
Table 1 presents results for regression (2) using the S&P100 and
the FTSE100 as the market portfolio for the full period for all stocks
and the four style portfolios. The first line presents estimated coef-
594 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598

Table 2
Herding during macroeconomic fundamental announcement days.

Panel A:US results Panel B: UK results

b1 b2 b3 b1 b2 b3
All stocks 0.4332 1.2901 1.2120 0.4552 2.7754 8.1783
(31.26) (4.71) (3.02) (33.97) (10.66) (4.24)
Large stocks 0.3916 0.4103 0.8468 0.4109 2.0164 7.5835
(27.41) (1.45) (2.04) (32.93) (8.31) (4.22)
Small stocks 0.4748 2.1860 1.5818 0.4996 3.5349 8.7728
(31.85) (7.42) (3.66) (26.68) (9.71) (3.25)
Value stocks 0.4409 1.5615 1.8201 0.5103 3.5081 8.1098
(27.21) (4.87) (3.88) (32.14) (11.37) (3.55)
Growth stocks 0.2162 2.2432 0.2459 0.3807 1.6691 3.7164
(13.13) (6.89) (0.51) (32.67) (7.37) (2.21)

Notes: The table presents results for regression: CSADi;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ b3 DUMt R2m;t þ et . DUM denotes a dummy variable that takes the value of one on a day when
fundamental macroeconomic announcements take place and zero otherwise. For DUM we employ announcement dates on important macroeconomic events such as changes
in the US federal funds rate, changes in the Bank of England base rate, days where news are released about indicators such as the gross domestic product, unemployment,
trade balance, inflation rate, consumer confidence, among others. Sources: U.S. Bureau of Economic Analysis (BEA); Federal Reserve (US); Office for National Statistics (ONS,
UK); and Bank of England. The sample period for these results is 1996–2011 due to the availability of announcement dates. Value (Growth) stocks are stocks with the highest
(lowest) B/M ratio, while Large (Small) stocks are stocks with the highest (lowest) market capitalization. t-Statistics appear in parentheses.

Table 3
Testing for spill-over herding effects.

Stocks b1 t-Statistic b2 t-Statistic b3 t-Statistic

Panel A. Spillover from US to UK
CSADUK;i;t ¼ b0 þ b1 jRUK;t j þ b2 R2UK;t þ b3 R2US;t et
1991–2011 0.4385 36.0 2.3065 8.82 2.1483 9.57
Peso Crisis 0.0252 0.61 0.0281 0.01 0.6600 0.23
Asian Crisis 0.2200 6.11 0.3440 0.27 1.2971 2.64
Russian Crisis 0.2788 8.09 1.1266 1.36 0.4121 0.76
Dotcom burst 0.4586 7.81 4.0821 2.09 0.8086 1.74
Subprime crisis 0.4204 16.3 1.0197 2.34 1.7827 4.71
Panel B. Spillover from UK to US
CSADUS;i;t ¼ b0 þ b1 jRUS;t j þ b2 R2US;t þ b3 R2UK;t þ et
1991–2011 0.3859 32.6 0.8375 3.54 2.3145 14.4
Peso Crisis 0.3008 4.46 5.4394 1.86 10.009 2.98
Asian Crisis 0.1732 1.85 1.7485 0.59 1.8791 2.28
Russian Crisis 0.28931 3.95 0.9794 0.53 2.3671 1.68
Dotcom burst 0.3325 6.25 0.3999 0.32 2.1252 5.43
Subprime crisis 0.4436 10.2 0.1281 0.08 0.9633 1.75

Notes: The results of regressionCSADUK;i;t ¼ b0 þ b1 jRUK;t j þ b2 R2UK;t þ b3 R2US;t þ et are presented in Panel A. The results for regression
CSADUS;i;t ¼ b0 þ b1 jRUS;t j þ b2 R2US;t þ b3 R2UK;t þ et are presented in Panel B. This is in effect the same regression as in Table 1 with the addition of one market’s squared market
return in the other market’s regression. A statistically significant and negative coefficient b3 will indicate herding spillover effects from one market to the other. Peso Crisis
refers to the period between December 1994 and July 1995; Asian Crisis refers to the period between July 1997 and March 1998; Russian Crisis refers to the period between
August 1998 and March 1999; Dotcom bubble burst refers to the period between January 2000 and June 2000; and Subprime Crisis refers to the period between January 2008
and April 2011.

ficients and t-statistics for all days, the second line presents results
only for days with a negative market return (‘‘down’’ days), and the
third line presents results only for days with a positive market
return (‘‘up’’ days). In Panel A (US results), the first, third, and fifth
columns present the estimated coefficients on the constant, linear
and non-linear term, respectively. The second, fourth, sixth col-
umns present their respective t-statistics. Panel B (UK results) is
arranged in a similar manner. For example, when all days are used
to estimate regression (2) for US stocks, the estimated value of the
constant coefficient is 0.01 with a t-statistic of 114.90, the market
beta is 0.38 with a t-statistic of 32.58, and the beta on the non-lin-
ear term is 1.69 with a t-statistic of 7.38. According to the results,
the coefficient on the non-linear term is consistently significant
and positive for both markets and for all style portfolios, suggest-
ing that herd behavior is not present for either market.
Table 2 presents results from regression (3) for the US market
(Panel A) and the UK market (Panel B), for all style portfolios.
The coefficient of interest here is b3; the coefficient on the news
release dummy variable. Note that for the US sample the
coefficient is negative and statistically significant (at the 5% level
of significance, denoted with bold) for all but one portfolio. For
example, for the all stock sample b3 is 1.21 with a t-statistic of
3.02. This indicates herding during days when important macro-
economic information is released, irrespective of investment style
(with the exception of investors in growth stocks). This is the case
for US investors only, since no relevant coefficient is negative and
significant in Panel B.
Table 3 presents results from regressions (4) and (5) for the
spill-over effects from the US to the UK (Panel A) and the spill-over
effects from the UK to the US (Panel B), for different crisis periods.
As above, the coefficient of interest here is b3; the coefficient that
captures spill-over effects from one market to the other. Note that
when we insert the squared US market returns in the UK regres-
sion, the coefficient b3 is negative and statistically significant (in
bold) in two cases: during the Asian crisis at the 5% level (1.30,
t-statistic: 2.64), and during the Dotcom bubble burst at the
10% level (0.81, t-statistic: 1.74). No coefficient is both negative
and statistically significant in Panel B. That is, during the Asian
 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598 595

Table 4
All stocks.

Dependent variable Total CSAD (CSAD,t) Fundamental driven CSAD (CSADFUND,t) Non-fundamental driven CSAD (CSADNONFUND,t)
Period b1 b2 b1 b2 b1 b2
Panel A: US results
1989–2011 0.3786 1.7708 0.0018 0.1107 0.3767 1.6614
(114.7) (7.71) (1.31) (4.12) (32.05) (7.18)
Peso Crisis 0.0537 6.7119 0.0094 0.3524 0.0632 6.3595
(0.91) (1.79) (0.88) (0.52) (1.06) (1.68)
Asian Crisis 0.1097 2.3507 0.0273 0.2837 0.0797 2.6904
(3.04) (3.49) (3.67) (2.04) (2.39) (4.30)
Russian Crisis 0.1659 1.9318 0.0237 0.3389 0.1422 2.2707
(3.09) (1.81) (2.83) (2.04) (2.59) (2.09)
Dotcom burst 0.1273 8.9902 0.0128 0.4571 0.1401 8.5330
(2.04) (6.14) (1.83) (2.79) (2.26) (5.87)
2000–2006 0.4289 1.2063 0.0002 0.1829 0.4291 1.0233
(17.67) (1.72) (0.06) (1.83) (17.70) (1.46)
Subprime crisis 0.5963 0.4922 0.0068 0.2222 0.6029 0.7118
(24.90) (1.70) (1.53) (3.42) (24.35) (1.97)
Panel B: UK results
1991–2011 0.4602 3.2996 0.0026 0.0355 0.4576 3.2635
(38.12) (13.63) (2.28) (1.55) (37.97) (13.50)
Peso Crisis 0.0254 0.0214 0.0190 0.3979 0.0443 0.4192
(0.62) (0.01) (2.47) (0.96) (1.10) (0.19)
Asian Crisis 0.2118 1.2181 0.0034 0.1616 0.2244 1.2649
(5.83) (0.99) 0.49) (0.69) (6.04) (1.02)
Russian Crisis 0.2748 1.0840 0.0131 0.2244 0.2879 0.8596
(8.08) (1.32) (1.71) (1.22) (8.39) (1.04)
Dotcom burst 0.4389 4.3112 0.0002 0.5714 0.4528 4.1415
(7.70) (2.27) (0.02) (2.40) (7.72) (2.25)
2000–2006 0.3926 4.3814 0.0017 0.0040 0.3944 4.3820
(21.54) (9.57) (0.84) (0.08) (21.51) (9.52)
Subprime crisis 0.4466 1.8982 0.0054 0.0058 0.4413 1.8925
(17.58) (4.78) (2.59) (0.18) (17.39) (4.77)

Notes: The Table presents results from the regressions: CSADFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et , and CSADNONFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et ; CSADNONFUNDt ¼ t , from
regression: CSADt ¼ b0 þ b1 ðRm;t  Rf Þ þ b2 HMLt þ b3 SMBt þ b4 MOMt þ t ; CSADFUND;t ¼ CSADt  CSADNONFUND;t . Peso Crisis refers to the period between December 1994 and
July 1995; Asian Crisis refers to the period between July 1997 and March 1998; Russian Crisis refers to the period between August 1998 and March 1999; Dotcom bubble
burst refers to the period between January 2000 and June 2000; and Subprime Crisis refers to the period between January 2008 and April 2011. t-Statistics appear in
parentheses.

Table 5
Herding due to fundamentals and non-fundamentals, US results, investment style portfolios.

Peso Crisis Asian Crisis Russian Crisis Dotcom burst 2000–2006 Subprime crisis
b1 b2 b1 b2 b1 b2 b1 b2 b1 b2 b1 b2
Panel A. Fundamental driven deviations(CSADFUND,t)
CSADFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et ,
Large 0.0086 0.0101 0.0261 0.3253 0.0221 0.3369 0.0087 0.2607 0.0038 0.2681 0.0070 0.1775
(0.85) (0.73) (3.79) (2.52) (2.95) (2.27) (1.43) (1.83) (1.37) (3.29) (2.29) (4.04)
Small 0.0130 0.2856 0.0336 0.3036 0.0254 0.3411 0.0170 0.6557 0.0034 0.0971 0.0065 0.2660
(1.02) (0.35) (4.07) (2.03) (2.65) (1.91) (2.03) (3.33) (0.80) (0.79) (1.01) (2.83)
Value 0.0083 0.3957 0.0227 0.2112 0.0193 0.2558 0.0102 0.3810 0.0009 0.1187 0.0055 0.1908
(0.87) (0.65) (3.66) (1.82) (2.71) (1.89) (1.72) (2.74) (0.30) (1.32) (1.33) (3.18)
Growth 0.0081 0.3527 0.0058 0.0501 0.0040 0.0304 0.0085 0.2104 0.0009 0.0330 0.0017 0.0583
(2.55) (1.64) (3.51) (1.63) (1.79) (0.68) (2.03) (2.15) (0.68) (0.85) (0.85) (1.97)
Panel B. Non-fundamental driven deviations (CSADNONFUND,t)
CSADNONFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et
Large 0.0388 3.6881 0.0370 2.6468 0.0884 2.0810 0.0655 10.8226 0.3428 1.6338 0.4884 0.8370
(0.56) (0.84) (1.04) (3.96) (1.59) (1.89) (0.94) (6.59) (15.20) (2.51) (19.65) (2.36)
Small 0.0487 6.8982 0.1229 2.7350 0.1964 2.4634 0.2151 6.2351 0. 5154 0.4131 0.7379 0.7582
(0.59) (1.31) (3.03) (3.61) (3.13) (1.98) (3.11) (3.85) (17.96) (0.50) (25.91) (1.83)
Value 0.0882 8.1829 0.0707 3.1978 0.2101 1.1610 0.1466 7.0044 0.4319 1.3698 0.6085 0.6056
(1.13) (1.64) (1.93) (4.66) (3.49) (0.97) (2.06) (4.20) (14.64) (1.61) (16.40) (1.69)
Growth 0.0867 4.8244 0.0055 0.6266 0.0161 1.1702 0.0429 0.2087 0.0429 0.2087 0.5395 0.2271
(1.26) (1.09) (0.11) (0.65) (0.24) (0.88) (0.40) (0.08) (0.40) (0.08) (30.58) (0.88)

Notes: The table presents results for various US investment style portfolios. See also Notes to Table 4; t-statistics appear in parentheses.

crisis and the Dotcom bubble burst, herding spill-over effects took driven CSAD (CSADFUND,t, see regression (9)), and the non-funda-
place from the US to the UK, but not the opposite. mental driven CSAD (CSADNONFUND,t, see regression (10)), during
Table 4 presents the results from regressions (9) and (10) for the the crisis periods discussed above. The coefficient of interest here
total CSAD measures (CSADt, see regression (2)), the fundamental- is b2; the coefficient on the squared term. Note that for the US mar-
596 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598

Table 6
Herding due to fundamentals and non-fundamentals, UK results, investment style portfolios.

Peso Crisis Asian Crisis Russian Crisis Dotcom burst 2000–2006 Subprime crisis
b1 b2 b1 b2 b1 b2 b1 b2 b1 b2 b1 b2
Panel A. Fundamental driven deviations (CSADFUND,t)
CSADFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et
Large 0.0081) 0.1458 0.0010 0.0851 0.0056 0.1099 0.0009 0.2699 0.0007 0.0001 0.0022 0.0058
(2.46 (0.80) (0.34) (0.86) (1.80) (1.44) (0.28) (2.60) (0.88) (0.00) (2.69) (0.44)
Small 0.0297) 0.6501 0.0057 0.2379 0.0204 0.3390 0.0013 0.8731 0.0027 0.0077 0.0084 0.0055
(2.45) (0.99) (0.52) (0.64) (1.68) (1.15) (0.10) (2.31) (0.82) (0.09) (2.53) (0.10)
Value 0.0237 0.5525 0.0048 0.1671 0.0161 0.2664 0.0017 0.6755 0.0020 0.004 0.0066 0.0007
(2.48) (1.06) (0.55) (0.56) (1.66) (1.13) (0.18) (2.25) (0.76) (0.06) (2.44) (0.01)
Growth 0.0171 0.4412 0.0035 0.1605 0.0125 0.2162 0.0004 0.5143 0.0013 0.0072 0.0046 0.0188
(2.50) (1.18) (0.55) (0.73) (1.76) (1.25) (0.06) (2.42) (0.68) (0.15) (2.40) (0.62)
Panel B. Non-fundamental driven deviations (CSADNONFUND,t)
CSADNONFUND;t ¼ b0 þ b1 jRm;t j þ b2 R2m;t þ et
Large 0.1179 2.6697 0.3078 1.1850 0.3182 1.8993 0.5190 3.9649 0.4183 4.3444 0.4000 1.4986
(2.46) (1.03) (7.69) (0.87) (8.10) (2.00) (9.15) (2.22) (20.84) (8.62) (22.41) (5.36)
Small 0.0292 3.5197 0.1221 1.5729 0.2573 0.1789 0.3864 4.3193 0.3705 4.4190 0.4826 2.2860
(0.47) (1.05) (2.50) (0.95) (5.98) (0.17) (5.24) (1.86) (16.75) (7.95) (13.34) (4.04)
Value 0.0423 3.1173 0.2020 1.3238 0.1931 0.1602 0.3203 3.8381 0.4231 5.2551 0.4894 2.2189
(0.88) (1.19) (5.37) (1.03) (5.17) (0.17) (6.96) (2.65) (19.84) (9.82) (15.93) (4.61)
Growth 0.0437 1.9705 0.2263 1.5215 0.5343 6.3178 0.3300 3.0230 0.3499 0.9150 0.3499 0.9150
(1.10) (0.92) (6.59) (1.30) (6.66) (2.50) (20.47) (7.46) (21.38) (3.57) (21.38) (3.57)

Notes: The table presents results for various UK investment style portfolios. See also Notes to Table 4; t-statistics appear in parentheses.

Table 7 ing the impact down to its different components leads to errone-
Summary of the results. ously assuming that no herding exists in all fundamental-herding
US findings UK findings
cases. For example, this is the case for the Asian crisis where there
is herding on fundamentals that is not picked up before the break-
Herding – Full Sample No No
Herding – Style Investing No No
down, perhaps due to cancelling-out or averaging effects.
Herding – Up Days No No Table 5 (6), presents the same results for various style portfolios
Herding – Down Days No No for the US (UK). As above, the coefficient of interest here is b2, and
Herding – Macro Info Days Yes No is denoted in bold when it is both negative and statistically signif-
Full Sample
icant. Panel A presents results from regression (9) (CSADFUND,t),
Herding – Macro Info Days Yes No
Full Sample while Panel B presents results from regression (10) (CSADNONFUND,-
Herding – Macro Info Days Yes (all styles) No t). According to Table 5, consistent with earlier findings for the US,
Style Investing the non-linear coefficient is negative and statistically significant (at
Herding – Spill Overs Yes the 5% or 10% level) during the Asian and the Russian crises when
(from US to UK during the No
Asian crisis and the
we use only the fundamentals driven deviations (Panel A). For
Dotcom bubble burst) example, b2 is 0.33 (t-statistic: 2.52) for large stocks during
Fundamental Herding Yes Yes the Asian crisis and 0.34 (t-statistic: 2.27) for large stocks dur-
(during the Asian and the (during the Dotcom ing the Russian crisis. When we use the non-fundamentals driven
Russian crisis for small, bubble burst for all
deviations (Panel B) the only statistically significant and negative
big, and value stocks) investment styles)
Non-Fundamental Herding Yes No coefficients are during the Subprime crisis: for instance, b2 is
(during the subprime 0.84 (t-statistic: 2.36) for large stocks. To summarize, for the
crisis for small, big, and US we have herding due to common reaction to fundamental infor-
value stocks) mation during the Asian and Russian crises and herding due to
non-fundamental information during the Subprime crisis.
For the UK data (Table 6) the non-linear coefficient is negative
and statistically significant (at the 5% level) during the Dotcom
ket (Panel A) when the total CSAD is employed, before the decom- bubble burst period when we use the fundamentals driven devia-
position, there is evidence of herding (at the 10% level of signifi- tions (Panel A), perhaps impacted by the US spillover. For example,
cance) during the Subprime crisis (in bold). When deviations are b2 is 0.27 (t-statistic: 2.60) for large stocks. Unlike the US we
decomposed to deviations due to fundamental and non-fundamen- detect no non-fundamentals herding, possibly because of the
tal factors the results indicate that US investors herded on funda- stronger presence of institutional investors in the UK. The evidence
mentals during the Asian and Russian crises and on non- also shows that US growth investors never herd, when in the UK, if
fundamentals during the Subprime crisis (see coefficients and t- there is herding, this also holds for growth portfolios.
statistics in bold; all significant at the 5% level). On the other hand,
for UK investors the results indicate herding on fundamentals only
during the Dotcom bubble burst (significant at the 5% level). This 5. Conclusion
may be partly due to the spillover from the US market. According
to the results, the consideration of different crises periods, as well This paper examines herd behavior towards the consensus
as the distinction of herding to fundamental and non-fundamental using daily price data for two important equity markets (US and
within each period is relevant. This distinction firstly explains any UK). The main findings are summarized in Table 7. The first issue
herding picked up by the CSAD term (for example, US Subprime that is evident from the results (first four lines in Table 4) is that
herding is intentional). Secondly, and more importantly, not break- when the full sample period and all stocks are used we find no evi-
 E.C. Galariotis et al. / Journal of Banking & Finance 50 (2015) 589–598
dence of herding for either market, even after examining possible
asymmetries such as days with a positive or negative market
return, i.e. ‘‘up’’ and ‘‘down’’ days. This result is consistent with
previous studies that detect no herding in the US (Chang et al.,
2000; among others).
When, however, we examine herding behavior in more detail
we uncover a number of interesting issues. Firstly, one of the main
findings of the paper is that US investors tend to herd towards the
consensus when important macroeconomic information is
released. It is the first time, to the best of our knowledge, that this
finding is reported. The implication is that the release of macro
information induces information-related herding. This result is
consistent with the notion that macroeconomic announcements
contain information that has an impact on investor behavior and
uncertainty (Fleming and Remolona, 1999; Nikkinen and
Sahlström, 2004) or that it affects investor forward-looking beliefs
and preferences (Beber and Brandt, 2006) since it may contain
information relevant for stock valuation (Boyd et al., 2005). It is
also consistent with the argument of Bikhchandani and Sharma
(2000) who distinguish between ‘‘spurious’’ herding and ‘‘inten-
tional’’ herding; the release of macro information seems to lead
to ‘‘spurious’’ herding, irrespective of investment style (small vs.
big, value vs. growth).
Furthermore, when we decompose return deviations from the
consensus to deviations due to fundamental information and devi-
ations due to non-fundamental information, we report evidence of
herding due to fundamental information in US stock returns during
the Asian and Russian crisis and herding due to non-fundamental
information during the Subprime crisis. At first sight this may seem
inconsistent with the findings of Hwang and Salmon (2004) who
report that during the Asian crisis and the Russian crisis herding
in the US was reduced; however, one must keep in mind here we
make a distinction between information and non-information
based herding. This further reinforces the necessity of this distinc-
tion in the literature to avoid cancelling out effects. As earlier, our
result is consistent with ‘‘spurious’’ herding where investors make
similar decisions because they face a similar fundamental-driven
information set, or with Chang et al. (2000) who argue that, for
the markets where they detect herding, macroeconomic informa-
tion matters.
Note, however, that not all crises periods seem to be the same:
during the recent Subprime crisis we find evidence of herding due
to non-fundamental information in the US, indicating that the
intensity and the proximity of the financial turmoil may affect
investor behavior. For example, US market participants may have
magnified events during this particular crisis (compared to previ-
ous crises) due to the availability, relevance, and intensity of infor-
mation. For example, Tversky and Kahneman (1973) have argued
that people may evaluate an event’s probability by the ease with
which relevant events are recalled to mind (‘‘availability heuris-
tic’’); in other words investors may heavily weigh information that
is easily memorable, recent, and personally observed and thus
react in an emotional manner. In addition, in the US, where retail
investors prevail, the subprime crisis had a direct impact on retail
investor portfolios, because unlike in past crises it affected nega-
tively the value of their real estate.
Without ruling out other differences, it seems that in the UK
there is little herding, and when so it is only on fundamentals. This
weak evidence is consistent with the modest levels of UK equity
managers herding observed by Wylie (2005). This finding is
another interesting result of the paper. Note that there is a gap
in the literature as regards to analytical results with market data
on herding for the UK market; the relevant studies tend to use data
either for fund managers (Wylie, 2005) or analysts (De Bondt and
Forbes, 1999). For the UK market we report fundamental-driven
herding only during the Dotcom bubble burst period. This finding
597
is consistent with earlier findings that herding may differ in geo-
graphic regions and depend more on fundamental analysis of infor-
mation (Zhou and Lai, 2009) and imply that the drivers of herd
behavior are period and country specific. As discussed in the intro-
duction and above, this could be further explained by institutional
differences. Thus, theoretical models that attempt to describe herd
behavior could benefit from taking this into account. Finally, con-
sistent with previous studies (Klein, 2013) we find that during
the Asian crisis and the Dotcom bubble burst herding spill-over
effects took place with a direction from the US to the UK; indicat-
ing that in reality, even the limited herding evidence for the UK
market may have a US origin.
Acknowledgements
We wish to thank the two anonymous referees for their very
insightful comments. Spyros Spyrou acknowledges financial sup-
port from the Research Centre at Athens University of Economics
and Business (RC-AUEB).
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