[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/vrs/ecobur/v9y2023i4p25-55n1.html
   My bibliography  Save this article

Analyst herding—whether, why, and when? Two new tests for herding detection in target forecast prices

Author

Listed:
  • Reveley Callum

    (University of Northumbria at Newcastle, Newcastle-upon-Tyne, NE1 8ST, United Kingdom)

  • Shanaev Savva

    (University of Northumbria at Newcastle, Newcastle-upon-Tyne, NE1 8ST, United Kingdom)

  • Bin Yu

    (Zhejiang University of Technology, Jianxing Building, 288 Liuhe Rd, Hangzhou, 310023, PR China)

  • Panta Humnath

    (School of Business, SH 126, Cal Poly Humboldt, 1 Harpst St, Arcata, CA 95519, USA)

  • Ghimire Binam

    (Robert Gordon University, Garthdee House, Garthdee Road, Aberdeen, AB10 7QB, Scotland, United Kingdom)

Abstract
This study proposes two novel tests for security analyst herding based on binomial correlation and forecast error volatility scaling, and applies it to investigate herding patterns in analyst target prices in 2008–2020 in the UK. Analysts robustly herd in their valuations, with results consistent across years, sectors, in terms of panel fixed effect, quantile, instrumental variable regressions, and when controlled for optimism and conservatism. Herding becomes prominent for stocks followed by at least five analysts and towards the long sides of Fama-French sorts, reinforcing its non-spurious and behavioral nature.

Suggested Citation

  • Reveley Callum & Shanaev Savva & Bin Yu & Panta Humnath & Ghimire Binam, 2023. "Analyst herding—whether, why, and when? Two new tests for herding detection in target forecast prices," Economics and Business Review, Sciendo, vol. 9(4), pages 25-55, December.
    • Handle: RePEc:vrs:ecobur:v:9:y:2023:i:4:p:25-55:n:1
    DOI: 10.18559/ebr.2023.4.892
    as

    Download full text from publisher

    File URL: https://doi.org/10.18559/ebr.2023.4.892
    Download Restriction: no
    File URL: https://libkey.io/10.18559/ebr.2023.4.892?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding and Contrarian Behavior in Financial Markets: An Internet Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1403-1426, December.
    2. Frijns, Bart & Huynh, Thanh D., 2018. "Herding in analysts’ recommendations: The role of media," Journal of Banking & Finance, Elsevier, vol. 91(C), pages 1-18.
    3. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
    4. Andreas Roider & Andrea Voskort, 2016. "Reputational Herding in Financial Markets: A Laboratory Experiment," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 17(3), pages 244-266, July.
    5. Roger, Tristan & Roger, Patrick & Schatt, Alain, 2018. "Behavioral bias in number processing: Evidence from analysts’ expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 315-331.
    6. Hwang, Soosung & Salmon, Mark, 2004. "Market stress and herding," Journal of Empirical Finance, Elsevier, vol. 11(4), pages 585-616, September.
    7. Obrien, Pc & Bhushan, R, 1990. "Analyst Following And Institutional Ownership," Journal of Accounting Research, Wiley Blackwell, vol. 28, pages 55-76.
    8. repec:bla:jfinan:v:58:y:2003:i:5:p:1933-1968 is not listed on IDEAS
    9. Savva Shanaev & Binam Ghimire, 2021. "Efficient scholars: academic attention and the disappearance of anomalies," The European Journal of Finance, Taylor & Francis Journals, vol. 27(3), pages 278-304, February.
    10. Huang, Joshua & Mujtaba Mian, G. & Sankaraguruswamy, Srinivasan, 2009. "The value of combining the information content of analyst recommendations and target prices," Journal of Financial Markets, Elsevier, vol. 12(4), pages 754-777, November.
    11. Richard W. Sias, 2004. "Institutional Herding," The Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    12. Shannon Lin & Hongping Tan & Zenan Zhang, 2016. "When Analysts Talk, Do Institutional Investors Listen? Evidence from Target Price Changes," The Financial Review, Eastern Finance Association, vol. 51(2), pages 191-223, May.
    13. Lin, Mei-Chen, 2018. "The impact of aggregate uncertainty on herding in analysts' stock recommendations," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 90-105.
    14. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
    15. Ishigami, Shohei & Takeda, Fumiko, 2018. "Market reactions to stock rating and target price changes in analyst reports: Evidence from Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 134-151.
    16. Alon Brav & Reuven Lehavy, 2003. "An Empirical Analysis of Analysts' Target Prices: Short‐term Informativeness and Long‐term Dynamics," Journal of Finance, American Finance Association, vol. 58(5), pages 1933-1967, October.
    17. Qi Chen & Wei Jiang, 2006. "Analysts' Weighting of Private and Public Information," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 319-355.
    18. Natividad Blasco & Pilar Corredor & Elena Ferrer, 2018. "Analysts herding: when does sentiment matter?," Applied Economics, Taylor & Francis Journals, vol. 50(51), pages 5495-5509, November.
    19. Trueman, Brett, 1994. "Analyst Forecasts and Herding Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 97-124.
    20. John A. Doukas & Chansog (Francis) Kim & Christos Pantzalis, 2005. "The Two Faces of Analyst Coverage," Financial Management, Financial Management Association, vol. 34(2), Summer.
    21. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    22. Kremer, Stephanie & Nautz, Dieter, 2013. "Causes and consequences of short-term institutional herding," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1676-1686.
    23. Harrison Hong & Marcin Kacperczyk, 2010. "Competition and Bias," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1683-1725.
    24. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    25. Choi, Nicole & Skiba, Hilla, 2015. "Institutional herding in international markets," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 246-259.
    26. John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
    27. Michael B. Clement & Senyo Y. Tse, 2005. "Financial Analyst Characteristics and Herding Behavior in Forecasting," Journal of Finance, American Finance Association, vol. 60(1), pages 307-341, February.
    28. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
    29. Nakamura, Alice & Nakamura, Masao, 1981. "On the Relationships among Several Specification Error Tests Presented by Durbin, Wu, and Hausman," Econometrica, Econometric Society, vol. 49(6), pages 1583-1588, November.
    30. Werner F. M. De Bondt & William P. Forbes*, 1999. "Herding in analyst earnings forecasts: evidence from the United Kingdom," European Financial Management, European Financial Management Association, vol. 5(2), pages 143-163, July.
    31. Galariotis, Emilios C. & Rong, Wu & Spyrou, Spyros I., 2015. "Herding on fundamental information: A comparative study," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 589-598.
    32. Junghee Lee & Jung-wha Lee, 2015. "Analyst Herding Behavior and Analyst Affiliation: Evidence from Business Groups," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 16(4), pages 373-386, October.
    33. David Y. Aharon, 2021. "Uncertainty, Fear and Herding Behavior: Evidence from Size-Ranked Portfolios," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(3), pages 320-337, July.
    34. John R. Graham, 1999. "Herding among Investment Newsletters: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(1), pages 237-268, February.
    35. Abarbanell, Jeffery & Lehavy, Reuven, 2003. "Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts' earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 105-146, December.
    36. Guo, Jiaqi & Holmes, Phil & Altanlar, Ali, 2020. "Is herding spurious or intentional? Evidence from analyst recommendation revisions and sentiment," International Review of Financial Analysis, Elsevier, vol. 71(C).
    37. Blake, David & Sarno, Lucio & Zinna, Gabriele, 2017. "The market for lemmings: The herding behavior of pension funds," Journal of Financial Markets, Elsevier, vol. 36(C), pages 17-39.
    38. Cheng, Lee-Young & Su, Yi-Chen & Yan, Zhipeng & Zhao, Yan, 2019. "Corporate governance and target price accuracy," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 93-101.
    39. Friesen, Geoffrey & Weller, Paul A., 2006. "Quantifying cognitive biases in analyst earnings forecasts," Journal of Financial Markets, Elsevier, vol. 9(4), pages 333-365, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Puput Tri Komalasari & Marwan Asri & Bernardinus M. Purwanto & Bowo Setiyono, 2022. "Herding behaviour in the capital market: What do we know and what is next?," Management Review Quarterly, Springer, vol. 72(3), pages 745-787, September.
    2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    3. Cui, Yueting & Gebka, Bartosz & Kallinterakis, Vasileios, 2019. "Do closed-end fund investors herd?," Journal of Banking & Finance, Elsevier, vol. 105(C), pages 194-206.
    4. I. Koetsier & J.A. Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," Working Papers 17-15, Utrecht School of Economics.
    5. Krokida, Styliani-Iris & Makrychoriti, Panagiota & Spyrou, Spyros, 2020. "Monetary policy and herd behavior: International evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 386-417.
    6. Lee, Kyuseok, 2017. "Herd behavior of the overall market: Evidence based on the cross-sectional comovement of returns," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 266-284.
    7. Wang, Hu & Li, Shouwei & Ma, Yuyin, 2021. "Herding in Open-end Funds: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    8. Galariotis, Emilios C. & Krokida, Styliani-Iris & Spyrou, Spyros I., 2016. "Bond market investor herding: Evidence from the European financial crisis," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 367-375.
    9. Liu, Tengdong & Zheng, Dazhi & Zheng, Suyan & Lu, Yang, 2023. "Herding in Chinese stock markets: Evidence from the dual-investor-group," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    10. Duygun, Meryem & Tunaru, Radu & Vioto, Davide, 2021. "Herding by corporates in the US and the Eurozone through different market conditions," Journal of International Money and Finance, Elsevier, vol. 110(C).
    11. I. Koetsier & J.A. Bikker, 2017. "Herding behaviour of Dutch pension funds in sovereign bond investments," Working Papers 17-15, Utrecht School of Economics.
    12. Santi, Caterina & Zwinkels, Remco C.J., 2023. "Exploring style herding by mutual funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    13. Lin, Mei-Chen, 2018. "The impact of aggregate uncertainty on herding in analysts' stock recommendations," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 90-105.
    14. Van Campenhout, Geert & Verhestraeten, Jan-Francies, 2010. "Herding Behavior among Financial Analysts: a literature review," Working Papers 2010/39, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    15. Fei, Tianlun & Liu, Xiaoquan, 2021. "Herding and market volatility," International Review of Financial Analysis, Elsevier, vol. 78(C).
    16. Beshears, John & Milkman, Katherine L., 2011. "Do sell-side stock analysts exhibit escalation of commitment?," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 304-317, March.
    17. Ahmad Fawwaz Mohd Nasarudin & Bany Ariffin Amin Noordin & Siong Hook Law & Mohd Hisham Yahya, 2017. "Investigation of Herding Behaviour in Developed and Developing Countries: Does Country Governance Factor Matters?," Capital Markets Review, Malaysian Finance Association, vol. 25(2), pages 1-14.
    18. Guo, Xu & Gu, Chen & Zebedee, Allan A. & Chiu, Li-ting, 2024. "The effect of institutional herding on stock prices: The differentiating role of credit ratings," Journal of Banking & Finance, Elsevier, vol. 163(C).
    19. Galariotis, Emilios C. & Rong, Wu & Spyrou, Spyros I., 2015. "Herding on fundamental information: A comparative study," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 589-598.
    20. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.

    More about this item

    Keywords

    ; behavioral finance; financial econometrics; herding; stock analyst;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:ecobur:v:9:y:2023:i:4:p:25-55:n:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.