Investor Attention, News and the Herd Behavior of Individual Stock Returns

Abstract

Structured Abstract

Purpose: This paper examines the herd behavior of individual returns around their industry average in stressful market condition, when industry-wide investor attention is high or low, and when good or bad industry-wide news reach the market.

Design/Methodology: Decile portfolios are formed based on proxies of aggregate market condition, industry-wide level of investor attention and industry-wide news signal. Indicator variables identifying the months in the highest and lowest portfolios are then entered in regression tests to capture the degree to which returns herd around their industry. Both cross-sectional and absolute deviations from industry average are used to measure herding.

Findings:  The analysis reveals that for the majority of industries, herding exist in calm market conditions. Moreover, herding appears to be concentrated in months where the industries record abnormally low returns and in months in which the industries receive good news.

Practical Implications: Understanding what drives the herd behavior of individual returns in financial markets portfolio may be of particular value to investment companies, such as hedge funds, who seek to time the market.

Originality/Value:  The paper offers new insights on the drivers of herding in financial markets. While prior studies focus on examining herding in market turmoil, this paper documents herding around extreme events and following news arrival.