Information asymmetry and Herding: new insights from the US and Chinese stock markets

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The academic research has highly focused on examining the investor’s behavior in stock markets. Many theories in psychology and sociology are used in the so called “Behavioral Finance” in order to explain the limits of the efficient market hypothesis and the financial market fragility. By analyzing the herding behavior, the researchers try to explain the market anomalies and the large market movements.
Although the existing herding literature has mainly focused on the existence (or nonexistence) of herding, our study focuses on the effect of information availability on herding. We aim to examine if herding is more pronounced in a high information asymmetry context. In other words, we investigate if herding is really driven by investors’ lack of information. We use the matching methodology in order to construct portfolios with different information asymmetry levels, yet with comparable firms’ characteristics. We treat different information asymmetry portfolios to examine herding in a developed and an emerging market (the US and Chinese stock markets).
The study covers an overall period from 2004 to 2012, which we split into pre-crisis,post-crisis and crisis period.
Main findings of CH 95 model show no evidence of herding regardless of the level of information asymmetry between firms and investors in both the US and Chinese stock
markets. On the other hand, the CCK 2000 model detects herding differences in the Chinese stock market depending on the information asymmetry level. The findings
suggest that the emerging markets are affected by herding during the crisis period, regardless of the firm size and information availability.

Author(s):

Omar Meharzi    
University Grenoble Alpes
France

Ijaz Ali    
University Grenoble Alpes
Saudi Arabia