No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Herding Over the Career
Abstract
We develop a model of decision-making when managers have private information about their abilities. With no private information about ability, managers ‘herd’. However, with sufficient private information, managers inefficiently ‘anti-herd’. The model potentially illuminates recent empirical work on career concerns.
... Let us suppose now that the ability of the two actors have different probabilities for agent B. As Avery and Chevalier (1999), we assume that agents have information about their ability 14 . There are therefore two distinct prior probabilities: the a priori probability of ability of agent B himself and of the first agent A 15 . ...
... Consequently, his future Overconfidence can explain why people are experimentally less prone to follow the herd (with θB"overconfident"> θB,) which is consistent with Kramer, Nörth and Weber (2006). 14 Differing from Avery and Chevalier (1999), this information is not private since these probabilities are assumed to be common knowledge. 15 Graham (1999, p.241) uses the term "initial reputation" to define this probability. ...
... This assumption "eliminates any incentive for manager 1 to signal his ability by deviating from the efficient outcome"(Avery and Chevalier [1999]). Agent A knowing that ω is close to 0 is incited to sell to be seen as an informed agent. ...
... Rich, Song, and Tracy (2012), Jurado, Ludvigson, and Ng (2015), and Glas and Hartmann (2016) …nd that dispersion of professional forecasts of gross domestic product growth is unrelated to their measures of uncertainty. 1 Underlying the interpretation of the extent of forecasters'disagreement as an indicator of uncertainty is an assumption that forecasters truthfully report their di¤erent beliefs (e.g., Diether, Malloy, and Scherbina (2002)). On the contrary, when forecasters engage in strategic misreporting of their beliefs, forecast dispersion increases or decreases with uncertainty depending on the misreporting incentives provided to the forecasters. ...
... If it did, some participants might shade their forecasts more toward the consensus (to avoid unfavorable publicity when wrong), while others might make unusually bold forecasts, hoping to stand out from the crowd." 1 Some papers document that uncertainty and disagreement are in general positively correlated but the relationship is sensitive to the period and the variable being forecast (see Zarnowitz and Lambros (1987), Rich, Raymond, and Butler (1992), Giordani and Soderlind (2003), and Boero, Smith, and Wallis (2008)). ...
... Many papers examine reputation concerns or agency issues of professional forecasters, for instance,Stickel (1992),Zwiebel (1995),Lamont (1995),Prendergast and Stole (1996),Ehrbeck and Waldmann (1996),Avery and Chevalier (1999),Hong and Kubik (2003), andClement and Tse (2005). ...
... First, we collect a novel dataset that allows us to link herding to actual sales, instead of using other indirect measures. 4 Because the potential customers in our data can sometimes observe actual sales volume for the focal product from earlier buyers, variations in the use of "sold box" allow for the identification of herding effects. ...
... inclined to herd [4,27,31]. Therefore, we hypothesize that: ...
Herding behavior refers to the behavior of individuals behaving similarly as a group without directions to coordinate. Herding can demonstrate rational characteristics. When consumers believe that others may have private information about a product, they infer unobserved information through other people’s behaviors, thereby engaging in similar actions themselves. While rational herding behavior has been found mostly in high involvement environments such as the financial markets, this paper provides evidence that such behavior may also occur in a comparatively lower involvement environment such as retailing. To demonstrate herding behavior and test shoppers’ rationality in such, the authors employ a unique dataset from a major TV shopping channel. In this setting, information about other buyers’ purchase decisions is only sometimes observed by shoppers. Evidence suggests that herding happens among shoppers and the herding behavior appears to exhibit rationality. The authors find that herding effects (1) are stronger when relative price discount is smaller, (2) are more prominent for a product category with less digitalizable attributes, and (3) appear to happen mainly in the earlier part of a sales pitch when shoppers have less information about a product and are more uncertain about their product valuation.
... Theoretical models of sequential decision-making suggest that di¤erences in ability or information quality can drive di¤erences in herding tendencies. For example, reputational herding models predict that while managers tend to follow their predecessors to enhance the market's perception of their ability, managers with superior ability might choose to antiherd, "going against market trends" (Avery and Chevalier (1999)). ...
... Moreover, a number of reputational herding models focus on the evolution of career concerns and herding incentives over a manager's career cycle, and derive implications for herding and antiherding behavior conditional on managerial experience. 21 In this line of research, Avery and Chevalier (1999) develop a model in which experienced managers who are aware of their superior ability choose to anti-herd, "demonstrating their self-con…dence by going against market trends." In a di¤erent setting, Prendergast and Stole (1996) show that agents who know their expertise may take bold actions to signal that they are talented. ...
We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund‐level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding‐antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.
This article is protected by copyright. All rights reserved
... They found that, consistent with the predictions from Scharfstein and Stein, managers tend to herd in the early stage of their careers since they have no information about their own ability. However, once the managers have sufficient information about their ability, they 'anti-herd', that is, they deliberately make the opposite decision to other investors (Avery and Chevalier, 1999). ...
The existence and extent of herding behavior in the financial market is an important topic to analyze, since herding impedes efficiency in the operation of the financial system, and more importantly, increases the risk of financial crisis. This paper discusses one type of herding behavior, namely reputation-based herding. Based on the model developed by previous researchers who focused on asset market in which price is fixed, I adapted the model to simulate the behavior of fund managers in stock market to capture the impact of price responses on the persistence of herding. This paper takes a purely theoretical approach. By building a model in Python to track the behavior of investors, I found that the increase in stock price followed by the bids of previous investors dampens herding behavior, although the extent of this dampening impact depends on several features of the stock market in consideration.
... In the context of mutual fund management teams, B€ ar et al. (2011) contradict the group shift hypothesis, support the diversification of perspectives and find that team-managed funds adhere to less extreme investment approaches, resulting in less extreme performance compared to single-managed funds. Moreover, as managers gain expertise, their tendency to herd diminishes (Avery and Chevalier, 1999;Chevalier and Ellison, 1999b;Menkhoff et al., 2006). ...
Purpose
The purpose of the study is to investigate, synthesize and critically evaluate empirical research findings on the behavioral traits of fund managers from 1994 to 2024. The ultimate goal is to provide a unified body of literature on three broad topics: first, fund managers' demographic and professional characteristics, such as age, gender, level of education and years of industry experience; second, fund managers' social and political connections; and third, fund managers' behavioral biases that lead to irrational investment decisions.
Design/methodology/approach
The relevant papers from selected journals were discovered and manually validated using the Scopus database. From 317 retrieved documents, 57 relevant articles were chosen and analyzed after the forward and backward search of the existing articles.
Findings
This paper presents a categorized summary of behavioral factors that have gained a foothold in influencing the behavior of fund managers in fund management research, with several studies demonstrating their significance leading to improved prediction and model precision, as this review indicates. In addition, the study summarized the contributions of prior empirical studies within the aforementioned three major categories and illustrated their consequences.
Originality/value
The present study contributes to the understanding of the effects of behavioral finance theories on fund managers by providing meaningful explanations of their behavioral traits based on empirical evidence and existing trends and knowledge gaps, both of which can influence the future direction of research.
... In another influential paper on reputational herding, Ottaviani and Sørensen (2000) Similarly, Avery and Chevalier (1999) argue that managers herd in the early stages of their career when they have no private information about their ability; however, as they gain experience and their information becomes more precise, they tend to 'anti-herd.' The work of Avery and Chevalier differs slightly from that of Scharfstein and Stein (1990) since they argue that herding managers obtain private information about their ability after a certain time. ...
... To protect their organizational reputation, managers are prone to ignoring their private information and attempting to follow the decisions of others (Scharfstein and Stein 1990;Trueman 1994). Several studies have proposed that concerns over reputation can motivate managers to follow the herding behavior of competitors when the latter's actions are observable (Scharfstein and Stein 1990;Trueman 1994;Prendergast and Stole 1996;Avery and Chevalier 1999). ...
When weak governance practices cause poor bank lending performance, banks are more likely to engage in ‘loan herding’ to avoid a sustained performance deterioration. Using the three main types of Chinese banks as our sample, this study first confirms the existence of loan herding and the positive effects of a weak board structure on poor lending performance (i.e. underperformance). Then, after finding positive impacts of this underperformance on loan herding, we examine whether board structure variables negatively affect loan herding. We find that higher director compensation, a moderate average age of directors, and higher director education levels significantly reduce bank loan herding, whereas board duality and the presence of very old directors significantly increase bank loan herding. Finally, we study the mediation effect of loan performance on the relationship between board structure and loan herding. Our results show that board governance quality affects loan performance, which, in turn, affects loan herding.
... That is, it appears that male divers 'learn' to be overconfident. While there are some explanations for overconfidence that grows with experience like ego-preserving biases (Gervais and Odean, 2001) and herding (Avery and Chevalier, 1999), it might also be the case that, in a competitive setting like freediving, announcements may also have a goal-setting role. For instance, Clark et al. (2016) document that goal setting can motivate college students to work harder and achieve better outcomes. ...
This study examines gender differences in overconfidence and decision-making in a high-stakes environment. Using data on more than 40,000 individual attempts from international freediving competitions, we provide evidence that women, on average, are less likely than men to overestimate their ability. This result is robust to different measures of overconfidence and can be partly explained by experience. There are no substantial gender differences on the intensive margin of overcon-fidence. In terms of performance, results suggest that women suffer more from overconfidence than men. JEL-Code: D03, D81, J16, Z2
... One is statistical herding (Banerjee, 1992;Bikhchandani, Hirshleifer, & Welch, 1992): when the two experts' opinions differ from each other, each expert loses confidence about her first opinion and thus, each may change her opinion. However, this incentive is mitigated by the anti-herding incentive (Avery & Chevalier, 1999;Effinger & Polborn, 2001;Levy, 2004). That is, if an expert changes her first opinion and follows that of the counterpart, this would reveal that the expert's ability is low. ...
To avoid unfavorable inferences about her ability, an expert might cling to her original opinion and ignore valuable new information in formulating subsequent opinions. Conceivably, the expert might decline an initial opportunity to offer an opinion, delaying the opinion formation until more accurate information has arrived. However, we show that reputational concerns often lead an expert to express an opinion at the first opportunity, thereby making a snap decision.
... More informed individuals have less incentive to wait and observe the actions of their peers, as they possess private information about the project (Bikhchandani et al. 1992). Theoretical models of sequential decision-making (Avery and Chevalier 1999) or of sequential information acquisition (Hirshleifer et al. 1994) suggest that informed investors act earlier and might choose to antiherd (Jiang and Verardo 2018) or anticipate the actions of later informed investors. We should thus observe that informed investors invest earlier in first-come first-served campaigns with a limited number of tokens on sale (in line with arguments related to equity crowdfunding as described in Hornuf and Schwienbacher (2018)). ...
This study is the first to provide systematic evidence regarding investor behaviour in initial coin offerings (ICOs), their investment patterns and their role in the success of campaigns. Using hand-collected data on 472 public token sales over the period of 2013–2017, we advance the ICO literature by demonstrating that some contributors often invest in more than one campaign, and such serial investors contribute earlier. However, they are not more informed and fail to pick better-quality ICOs. Only large serial investors invest more in campaigns that raise more funds, attract more contributors, are more likely to reach their hard caps, and distribute tokens that are listed on crypto exchange. Our findings raise the question of whether regulatory or industry self-regulation agreements on information provision measures are needed to protect smaller retail ICO investors that exhibit naïve reinforcement learning behaviour.
... Semakin bertambah usia, maka semakin bijak sana seseorang. Menurut Avery & Chevalier, (1999 Perusahaan (Belkhir, 2009). CEO yang telah berada di atas pimpinan untuk periode yang lebih lama diharapkan berkinerja lebih baik dari pada mereka yang berada pada periode lebih pendek. ...
Tujuan dari penelitian ini adalah untuk menganalisis seberapa besar pengaruh Ukuran Dewan Komisaris, Umur Dewan Direksi dan Masa jabatan Dewan Direksi terhadap Kinerja perusahaan pada perusahaan go publik Indonesia yang bergerak di industri keuangan, khususnya perbankan. Sampel akhir terdiri dari 25 perusahaan perbankan tahun 2012-2016. Data yang digunakan dalam penelitian ini adalah data sekunder. faktor-faktor yang diteliti dalam penelitian ini ada 3 yaitu variabel dependent , variabel independent dan variabel kontrol. Kinerja perusahaan sebagai variabel dependen. Ukuran dewan komisaris, umur dewan direksi dan masa jabatan dewan direksi sebagai variabel independen. Umur perusahaan, ukuran perusahaan dan leverage sebagai variabel kontrol. Alat analisis yang digunakan untuk menguji variabel adalah analisi regresi linear berganda. Jel Classification: D29; D29; D29; D21
... Studies in sociology literature also supports this idea [31] [32]. Older managers will have more confidence in their abilities so they do more aggressive trading as compared to young managers [33]. Graham [26], Li [34], Boyson [35] analysed that risk taking in financial sector decreases with age and experience of managers. ...
... Second, studies suggest that herding decreases when the levels of information, profession, and experience increase (Avery and Chevalier 1999;Venezia et al. 2011). We use a manager's ability and firm efficiency constructed by Demerjian et al. (2012) as alternative In Panel A, we use two measures of litigation risk, industry membership and percentage of contingent guarantee liability, to respectively test the effect of litigation risk on the managers' reactions to their peer firms' disclosure frequency/horizon. ...
This paper investigates how industry peer firms influence the voluntary disclosure strategies of individual firms. Our 2SLS regressions on an empirical sample of management earnings forecasts show that the disclosure strategies of individual firms are significantly influenced by their peer firms’ disclosure behaviors. Specifically, the increased disclosure frequency and disclosure horizon of their industry peers encourage individual firms to increase their disclosure frequency and disclosure horizon. Moreover, firms with S&P credit ratings, higher profitability, larger size, and/or a higher market-to-book ratio tend to be more sensitive to their peer firms’ voluntary disclosure frequency, and react more strongly to peer firms that are of dissimilar size or profitability. Finally, we find that the leader–follower relation does not influence the effects of peer firms’ disclosure strategies. Additional tests suggest that signaling theory and litigation risk provide stronger explanations of why firms mimic their peers than herding theory and free rider theory. This paper contributes to the accounting literature by providing new evidence on the effects of voluntary disclosure. Our findings are also of relevance to industry practitioners, and they shed light on the recently proposed voluntary disclosure regulations.
... Literature on career concerns has focused on ex ante risk choice (Scharfstein and stein (1990), Zwiebel (1995), Prendergast and Stole (1996), and Avery and Chevalier (1999)). Bjork, Hansen, Torstad and Hamilton (2007) discovered that nurses with a master"s degree or other continuing education were more satisfied than those without additional education and older nurses were more satisfied with their career than those younger ones. ...
This study explored effect of error-strain, covering-up errors, gender and education on career concerns among staff of Department of Petroleum Resources, Nigeria. Quasi-experimental research design, purposive and convenience sampling techniques were adopted. 217 male and female staff participated. A questionnaire form was administered to participants. Three hypotheses were tested using univariate analysis of variance and t-test of Independent groups. Results showed that, covering-up errors significantly affected career concerns F (3, 213) = 5.432; P<.05. However, error-strain did not affect career concerns F (3, 213)= 1.133; P>.05. Furthermore, covering-up errors and error-strain did not have interaction effect on career concerns, F (3, 213)= 0.083; P>.05. Female participants significantly scored higher on career concerns than male participants (t= .07, df (215) p <.05). Similarly, low educated staff significantly scored higher on career concerns than the high educated staff (t= 3.52, df (189) p <.05). Hence, it was concluded that, covering-up errors, gender and education are significant factors that affect career concerns among employees. Recommendation was given that managers should give more managerial attentions to female employees to help them match equally with their male counterparts on education and job related skills so that they feel comfortable with their chosen career.
... Early research into managerial aspects of mutual funds was undertaken by Khorana (1996) who looked at the turnover of top management at mutual funds and Avery and Chevalier (1999) who considered the relationship between fund manager's behaviour and fund performance. Khorana, Servaes, and Wedge (2007a) looked at the impact of manager ownership of the funds they manage and concluded that managerial ownership creates a positive incentive alignment between mutual fund managers and mutual fund investors as managerial ownership is correlated with improved performance. ...
... A more direct way to test the relation between career concern and risk taking is to analyze investment behavior of managers. Avery and Chevalier (1999) analyze the managerial labor market for mutual fund managers and they conclude "…younger managers do indeed take on less unsystematic risk than their older counter-parts." However, Boyson (2010) examines investment patterns of hedge fund managers and finds strong negative correlation between managerial experience and managerial risk appetite. ...
There are many incentive factors affecting managers' risk appetite. This study reviews the incentive literature and analyses arguments highlighting the impact of implicit and explicit incentives on managerial risk taking and the results of empirical studies on the issue. The paper also assesses main policy responses against excessive risk taking and concludes that current policies centered on fixing contractual schemes are not adequate to fix these incentive problems.
Innovation is a key driver of long-term economic growth and has significantly improved living standards. Corporate innovation efforts are at the forefront of this process. We propose a two-period career concern model to better understand the factors that influence a corporation’s decision to undertake risky innovation. In this model, a corporation’s manager is influenced by the company’s corporate governance structure and the level of competition in the product market. Our research shows that strong corporate governance positively impacts a manager’s decision to innovate due to career concerns. However, we also found that firms in industries with low competition benefit more from good governance than those in highly competitive industries. This conclusion is supported by our analysis of a panel data set from the 1990s, which contains information on time-varying patent citations in the US.
This paper analyzes the herding behavior that characterizes lenders’ lending decisions on a microloan platform and explains how rational herding behavior can resolve the information-asymmetry problem, which is a well-known reason for the failure of online microloan platforms. Using a set of panel data on individual lending decisions acquired from Paipaidai.com (PPDai), an online microloan platform, we examine the influence of the lending decisions of prominent, experienced lenders on novice lenders to identify rational herding behavior. Our empirical analysis demonstrates that rational herding behavior can in fact efficiently reduce lender loss from borrower defaults caused by limited information. Although it is typically assumed that herding behavior is irrational, we find that it can be rational in this context and can thus shed light on why PPDai has succeeded while most other microloan platforms have failed. Accordingly, we make three key contributions: 1) we use heterogeneous herding effects to empirically determine whether lenders’ herding behavior on PPDai is rational based on observational learning; 2) we investigate the moderating effect of borrower credit and novice-lender experience on herding, and we leverage this heterogeneity in lender experience to better explain loan results; and 3) because PPDai publicly provides potential lenders with a transparent credit score—in contrast to platforms like Prosper.com, which leverage hidden proprietary credit information from Experian—we further analyze the credit composition of prominent lenders to better understand the crucial determinants of rational herding. In fact, our follow-up survival simulations indicate that without rational herding, the total number of successful PPDai loans would have decreased by around 46 percent during the study period—a finding that further underlines the crucial influence of rational herding and the unique contextual factors of PPDai that have fostered it.
This chapter focuses on the benefits and on the threats of active management retracing the most significant contributions of the extensive literature on this topic. We firstly focus on the definition of active management, active risk and on the sources of alpha. Then we focus on the main issues of interest concerning active management, namely: (1) the higher costs and underperformance of active funds compared with respect to index funds; (2) the attitude of herding which can generate market inefficiencies; (3) the impact of the incentive schemes, short-terminism, and incentive fees on returns; (4) the threats and opportunities of mispricing and market anomalies.KeywordsActive managementHerdingIncentive schemesBehavioural managers
This paper analyzes the herding behavior that characterizes lenders’ lending decisions on a microloan platform and explains how rational herding behavior can resolve the information-asymmetry problem, which is a well-known reason for the failure of online microloan platforms. Using a set of panel data on individual lending decisions acquired from Paipaidai.com (PPDai), an online microloan platform, we examine the influence of the lending decisions of prominent, experienced lenders on novice lenders to identify rational herding behavior. Our empirical analysis demonstrates that rational herding behavior can in fact efficiently reduce lender loss from borrower defaults caused by limited information. Although it is typically assumed that herding behavior is irrational, we find that it can be rational in this context and can thus shed light on why PPDai has succeeded while most other microloan platforms have failed. Accordingly, we make three key contributions: (1) we use heterogeneous herding effects to empirically determine whether lenders’ herding behavior on PPDai is rational based on observational learning; (2) we investigate the moderating effect of borrower credit and novice-lender experience on herding, and we leverage this heterogeneity in lender experience to better explain loan results; and (3) because PPDai publicly provides potential lenders with a transparent credit score—in contrast to platforms like Prosper.com, which leverage hidden proprietary credit information from Experian—we further analyze the credit composition of prominent lenders to better understand the crucial determinants of rational herding. In fact, our follow-up survival simulations indicate that without rational herding, the total number of successful PPDai loans would have decreased by around 46% during the study period—a finding that further underlines the crucial influence of rational herding and the unique contextual factors of PPDai that have fostered it.
This paper investigates the impact of peer performance on the asymmetric timeliness of earnings recognition. We find a positive relationship between peers' weak performance and timely bad news disclosure. Our results are robust to a variety of tests, including instrument variable approach, difference-in-differences analysis, alternative measures and subsample analysis. Consistent with the notion that weak peer performance increases investors' demand for information, the relationship is more profound for firms suffering from high information externality, with weak governance and high information asymmetry. Furthermore, we find that the relationship is difficult to reconcile with the explanation of managers' herding behaviour. In addition, we show that conservative accounting information disclosure due to weak peer performance alleviates managerial bad news hoarding and information asymmetry for underperforming firms, but distorts investment decisions for outperforming firms. We highlight the spillover effect of peer performance on conservative accounting information and the related heterogeneous outcomes.
The international corporate governance literature generally regards ‘comply-or-explain’ regimes as positive. By examining the recent Japanese governance reforms, we show these policies have inadvertently led to overcompliance by target firms and, importantly, non-target firms. The latter group mimicked the compliance behavior of sector‑leading firms, and this herding was to the detriment of their shareholder value. The growing demand for and the limited supply of qualified outside directors led firms to appoint individuals with lower advising ability such as busy directors. We also find a larger reduction in the market value of small and R&D intensive firms, and those with low foreign ownership and high retail ownership. These findings have important implications for the international governance literature regarding the ineffectiveness of one-size-fits-all regulation even when it is voluntary.
Using taxicab tipping records in New York City (NYC), we develop a novel measure of real-time utility and quantitatively assess the impact of wealth change on the well-being of individuals based on the core tenet of prospect theory. The baseline estimate suggests that a one-standard-deviation increase in the stock market index is associated with a 0.3% increase in the daily average tipping ratio, which translates to an elasticity estimate of 0.3. The impact is short-lived and in line with the wealth effect interpretation. Consistent with loss aversion, we find that the impact is primarily driven by wealth loss rather than gain. We exploit Global Positioning System and timestamp information and design two difference-in-differences tests to establish causal inference. Exploitation of the characteristics of individual stocks suggests that the effect of wealth change on real-time utility is more pronounced in the stocks of firms with large market capitalization. Finally, our aggregate estimate suggests that annual tip revenue in the NYC taxi industry is associated with stock market fluctuations, ranging from −12.9 million.
This paper was accepted by Tyler Shumway, finance.
This paper investigates the performance consequences of the risk shifting behavior shown by domestic equity mutual funds through the analysis of monthly portfolio holdings. The objective of this paper is to assess the implications of risk shifting for mutual fund investors. Specifically, we study the performance consequences of different mechanisms of risk shifting, such as the change in the composition between equity and cash holdings and the change of the systematic or idiosyncratic risk within the equity positions. We find that funds that increase their risk level obtain significantly better performance than funds with stable or reduced risk levels. This finding is robust when controlling for fund characteristics such as past performance and fund size. Additionally, we examine whether the performance consequences of risk shifting depends on fund manager characteristics and find that manager gender, education and level of specialization are revealed as important variables to differentiate the performance consequences of risk shifting.
This study is the first to provide systematic evidence on the investors’ behavior in ICOs, their investment patterns and role in campaigns’ success. Using hand-collect data on 374 token sales, which ran from 2013 to September 2017, we fill the gap in the ICO literature and study more than 300,000 contribution addresses that sent funds to ICOs in Bitcoins or in Ether. We show that participants often invest more than in one campaign, and recurrent investors contribute earlier, however, they are not more informed and fail to select only better-quality ICOs. In contrasts, larger investors not only seem to time the market but also invest in campaigns that raise more funds, are more probable to reach their hard caps and have tokens that are ranked higher following token sales. The results are robust across various classifications of investors by frequency and size of investment.
How does transparency, a key feature of central bank design, affect monetary policy makers' deliberations? Theory predicts a positive discipline effect and negative conformity effect. We empirically explore these effects using a natural experiment in the Federal Open Market Committee in 1993 and computational linguistics algorithms. We first find large changes in communication patterns after transparency. We then propose a difference-in-differences approach inspired by the career concerns literature, and find evidence for both effects. Finally, we construct an influence measure that suggests the discipline effect dominates. © The Author(s) 2017. Published by Oxford University Press on behalf of the President and Fellows of Harvard College. All rights reserved.
We analyze what a second business degree reveals about the investment behavior of mutual fund managers. Specifically, we compare the investment risk and style of managers with both a CFA designation and an MBA degree to managers with only one of these qualifications. We document that managers with both degrees take fewer risks, follow less extreme investment styles, and achieve less extreme performance outcomes. Our results are consistent with the explanation that managers with a certain personal attitude that makes them take fewer risks and invest more conventionally choose to gain both qualifications. We rule out several alternative explanations: our results are not driven by the respective contents of the MBA and the CFA program, by the manager's skill, or by the fund family's investment policy.
It is conventionally perceived in the literature that weak analysts are likely to under-weight their private information and strategically bias their announcements in the direction of the public beliefs to avoid scenarios where their private information turns out to be wrong, whereas strong analysts tend to adopt an opposite strategy of over-weighting their private information and shifting their announcements away from the public beliefs in an attempt to stand out from the crowd. Analyzing a reporting game between two financial analysts, who are compensated based on their relative forecast accuracy, we demonstrate that it could be the other way around. An investigation of the equilibrium in our game suggests that, contrary to the common perception, analysts who benefit from information advantage may strategically choose to understate their exclusive private information and bias their announcements toward the public beliefs, while exhibiting the opposite behavior of overstating their private information when they estimate that their peers are likely to be equally informed. This article is protected by copyright. All rights reserved
This study provides a new explanation for the weak sensitivity of investors' flows to poor fund performance based on fund managers' incentives to herd from career concerns. We show that a manager's decision to trade with (against) the herd decreases (increases) significantly investors' willingness to redeem capital from underperforming funds. We argue that this differential investor reaction to poor performance conditional on herding explains the lower termination risk identified among herding managers. We also find that financial intermediaries do not mitigate this sub-optimal investors' response. Our findings support the view that underperforming funds can retain larger payoffs if they herd.
Purpose
– The purpose of this paper is to identify the implications of managerial herding for investors’ wealth and capital allocation across funds, and the critical role played by fund governance in monitoring herding incentives.
Design/methodology/approach
– The author adopt the fund herding measure first proposed by Grinblatt et al. (1995) over the long sample period 1992-2007. Univariate and multivariate tests are then constructed to examine the relationship between managerial herding, performance, and investors’ sensitivities. OLS, fixed-effect panel data models are utilized to conduct the tests.
Findings
– The author show that managers that do not herd have above-average managerial skills, trade less on noise, and significantly outperform herding managers. The author also illustrate that although fund herding could be used as a signal of managerial quality, underperforming herding funds manage to survive in equilibrium, indicating that investor flows do not adequately respond to the information content of a persistent herding behavior. Finally, the author demonstrate that better governance in the form of stronger managerial incentive schemes constitutes a significant deterrent against detrimental herding strategies, representing an effective monitoring device of the response of fund managers to poor flow-performance sensitivity.
Originality/value
– The paper provides original evidence on the efficacy of external and internal governance in deterring wealth-reducing herding strategies. The author document that where more effective managerial incentives schemes are put in place by the management companies, fund managers are more likely to be better informed, resulting in fewer incentives to mimic the trading decisions of their peers.
In this paper we explore the performance and efficiency of risk managers of Saudi Arabia, based on their relative traits and their effectiveness in meeting their personal performance targets. Here we present a complementary survey evidence of 110 risk managers of Saudi Arabia, which can improve our understanding in this field. By the scope of this paper we study the capability of these managers in mitigating their previous losses and the factors which mainly affect their performance. We also study the importance given and the extent of Basel II implementation in Saudi Arabian banking sector.
This chapter develops a unified modeling framework for analyzing the strategic behavior of forecasters. The theoretical model encompasses reputational objectives, competition for the best accuracy, and bias. Also drawing from the extensive literature on analysts, we review the empirical evidence on strategic forecasting and illustrate how our model can be structurally estimated.
We review the recent trends in investment management and performance research and highlight the fields expected to develop further in the future. The trend to adapt the classic CAPM and factor models seems likely to continue, with the drive for realistic factors, which best proxy the drivers of investment performance, playing a key role. The search for skill, based on enhanced benchmarks is also a developing area, with new concepts of identification and verification at the fore. The availability of more qualitative data has allowed corporate finance themes such as agency conflict and incentives to be explored. These are some of the areas where we have seen major developments in recent years and where we expect to see continuing development.
In the presence of principal-agent problems, published macroeconomic forecasts by professional economists may not measure expectations. Forecasters may use their forecasts in order to manipulate beliefs about their ability. I test a cross-sectional implication of models of reputation and information-revelation. I find that as forecasters become older and more established, they produce more radical forecasts. Since these more radical forecasts are in general less accurate, ex post forecast accuracy grows significantly worse as forecasters become older and more established. These findings are consistent with reputational factors at work in professional macroeconomic forecasts.
This paper examines individual decision making when decisions reflect on people's ability to learn. The authors address this problem in the context of a manager making investment decisions on a project over time. They show that, in an effort to appear as a fast learner, the manager will exaggerate his own information but ultimately he becomes too conservative, being unwilling to change his investments on the basis of new information. The authors' results arise purely from learning about competence rather than concavity or convexity of the rewards functions. They relate their results to the existing psychology literature concerning cognitive dissonance reduction. Copyright 1996 by University of Chicago Press.
We examine the labor market for mutual fund managers. Using data from 1992–1994, we find that “termination” is more performance-sensitive
for younger managers. We identify possible implicit incentives created by the termination-performance relationship. The shape
of the termination-performance relationship may give younger managers an incentive to avoid unsystematic risk. Direct effects
of portfolio composition may also give younger managers an incentive to “herd” into popular sectors. Consistent with these
incentives, we find that younger managers hold less unsystematic risk and have more conventional portfolios. Promotion incentives
and market responses to managerial turnover are also studied.
Several theories of reputation and herd behavior (e.g., Scharfstein and Stein (1990) and Zweibel (1995)) suggest that herding among agents should vary with career concerns. Our goal is to document whether such a link exists in the labor market for security analysts. We find that inexperienced analysts are more likely to be terminated for inaccurate earnings forecasts than are their more experienced counterparts. Controlling for forecast accuracy, they are also more likely to be terminated for bold forecasts that deviate from the consensus. Consistent with these implicit incentives, we find that inexperienced analysts deviate less from consensus forecasts. Additionally, inexperienced analysts are less likely to issue timely forecasts, and they revise their forecasts more frequently. These findings are broadly consistent with existing career concern motivated herding theories.
This paper examines some of the forces that can lead to herd behavior in investment. Under certain circumstances, managers simply mimic the investment decisions of other managers, ignoring substantive private information. Although this behavior is inefficient from a social standpoint, it can be rational from the perspective of managers who are concerned about their reputations in the labor market. The authors discuss applications of the model to corporate investment, the stock markets, and decision-making within firms. Copyright 1990 by American Economic Association.
In our 1990 paper, we showed that managers concerned with their reputations might choose to mimic the behavior of other managers and ignore their own information. We presented a model in which "smart" managers receive cor- related, informative signals, whereas "dumb" managers receive independent, uninformative signals. Managers have an incentive to follow the herd to indicate to the labor market that they have received the same signal as others, and hence are likely to be smart. This model of reputational herding has subsequently found empirical support in a number of recent papers, including Judith A. Chevalier and Glenn D. Ellison's (1999) study of mutual fund managers and Harrison G. Hong et al.'s (2000) study of equity analysts. We argued in our 1990 paper that reputa- tional herding "requires smart managers' pre- diction errors to be at least partially correlated with each other" (page 468). In their Comment, Marco Ottaviani and Peter Sørensen (hereafter, OS) take issue with this claim. They write: "correlation is not necessary for herding, other than in degenerate cases." It turns out that the apparent disagreement hinges on how strict a definition of herding one adopts. In particular, we had defined a herding equilibrium as one in which agent B always ignores his own informa- tion and follows agent A. (See, e.g., our Prop- ositions 1 and 2.) In contrast, OS say that there is herding when agent B sometimes ignores his own information and follows agent A. The OS conclusion is clearly correct given their weaker definition of herding. At the same time, how- ever, it also seems that for the stricter definition that we adopted in our original paper, correlated errors on the part of smart managers are indeed necessary for a herding outcome— even when one considers the expanded parameter space that OS do. We will try to give some intuition for why the different definitions of herding lead to different conclusions about the necessity of correlated prediction errors. Along the way, we hope to convince the reader that our stricter definition is more appropriate for isolating the economic ef- fects at work in the reputational herding model. An example is helpful in illustrating what is going on. Consider a simple case where the parameter values are as follows: p 5 3⁄ 4; q 5 1⁄ 4; z 5 1⁄ 2, and u 5 1⁄ 2. In our 1990 paper, we also imposed the constraint that z 5 ap 1 (1 2 a)q, which further implies that a 5 1⁄ 2. The heart of the OS Comment is the idea that this constraint should be disposed of—i.e., we should look at other values of a. Without loss of generality, we will consider values of a above 1⁄ 2, and distinguish two cases.
Career concerns of mutual fund managers. NBER working paper 6394, and forthcoming in
- J Chevalier
- G Ellison
Chevalier, J., Ellison, G., 1998. Career concerns of mutual fund managers. NBER working paper 6394, and forthcoming in Quarterly Journal of Economics
Macroeconomic forecasters and microeconomic forecasts, NBER, Working paper 5284
- O Lamont
Lamont, O., 1995. Macroeconomic forecasters and microeconomic forecasts, NBER, Working paper 5284.