Herding Among Individual Investors

The conjecture that investor sentiment leads important groups of investors to act similarly and thereby affect prices is an important ingredient of models of noise trading and style investing. In contrast to Lakonishok et al. (1992), who find only weak evidence of herding among institutional investors and conjecture that retail investors will herd even less, we document that a sample of over 30,000 retail clients at a German broker exhibits a strong tendency to herd at daily and quarterly horizons. Furthermore, we find a negative correlation between returns and retail buying which is entirely due to negative returns triggering the execution of limit buy orders (and positive returns triggering the execution of limit sell orders). Once we confine our attention to market orders, the correlation between retail buying and returns turns positive, especially for stocks in which retail investors own a comparatively high fraction of the company. Our results further strengthen the case for a positive impact of individual investor sentiment on returns, as suggested by Ofek and Richardson (2003) and Dorn (2002). ∗Graduate School of Business, Columbia University; 311 Uris Hall; 3022 Broadway; New York, NY 10027; Email: [email protected] †Graduate School of Business, Columbia University; 807 Uris Hall; 3022 Broadway; New York, NY 10027; Email: [email protected] ‡Corresponding author; Finance Group, FEE, Universiteit van Amsterdam; Roetersstaat 11; 1018 WB Amsterdam; The Netherlands; Email: [email protected]