Individual and institutional herding and the impact on stock returns: Evidence from Taiwan stock market

a r t i c l e i n f o Using high frequency intraday data, this paper investigates the herding behavior of institutional and individual investors in the Taiwan stock market. The study finds evidence of herding by both investors but a stronger herding tendency among institutional than among individual investors. Institutional investors herd more on firms with small capitalizations and lower turnovers and they follow positive feedback strategies. The portfolios that institutional investors herd buy outperform those they sell by an average of 1.009% during the 20 days after intense trading episodes. By contrast, individual investors herd more on firms with small sizes and higher turnovers, and they crowd to buy (sell) stocks with negative (positive) past returns. The portfolios that individual investors herd buy underperform those they sell by an average of − 0.829% during the following 20 days. Moreover, these return differences of both investors are more pronounced under a market with higher pressure and among small stocks. These findings suggest that the herding of institutional investors speeds up the price-adjustment process and is more likely to be driven by correlated private information , while individual herding is most likely to be driven by behavior and emotions. This paper examines the herding behavior of different types of investors. Herding describes the tendency of investors to cumulate on the same side of the market or to follow the lead of others when they trade. The bulk of the research examines and confirms institutional investors' herding behavior. However, do individual investors herd for the same reason as institutional investors? Does market pressure, such as volatile market conditions, affect herding? Does the herding behavior of different types of investors destabilize stock prices or speed up the price adjustment? The aim of this paper is to answer these questions. There are several theories explaining why investors show similarity in their behavior. Generally, the causes of herding can be separated into two types: information-driven and behavior-driven (Bikhchandani & Sharma, 2001; Kremer, 2010). Each herding type affects market efficiency differently. Information-driven herding may indicate that investors are facing similar decision problems and receiving correlated private information (e.g., Hirshleifer, Subrahmanyam, & Titman, 1994). Similar educational and professional backgrounds may also be a cause of herding as, for example, when a group of investors trades on stocks with certain characteristics, such as liquidity and size (e.g., Falkenstein, 1996). Finally, investors may herd because they …