Abstract
This article investigates whether a mutual fund’s performance is related to its herding behavior. Using the methodology of Sias (Rev Finance Stud 17:165–206, 2004), we develop a measure to capture the magnitude that a fund’s buy (sell) decisions are leading other funds’ buys (sells), and find that a fund’s performance is positively (negatively) related to its “buy leading” (“sell leading”). We interpret these findings as evidence that “buy leaders” (“sell leaders”)’ performance benefits (suffers) from the positive (negative) price effect associated with buy (sell) herds. Additionally, we find a positive relationship between fund performance and valuation-motivated “buy leading”, while we find weak evidence on the relationship between performance and valuation-motivated “sell leading”. We interpret these results as evidence that leading funds’ outperformance is due, in part, to their ability to value stocks.
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Notes
For reasons of brevity, we only discuss the evidence when we restrict our sample to stocks with at least 5 traders. Nevertheless, the evidence is similar when we restrict our sample to stocks with at least 2 traders, or 10 traders, respectively.
For the remainder of our analysis, we will use the classification criteria from Panel C to identify funds as buyers and/or sellers. We also performed the analysis using the criteria used in Panels A, and B, respectively, and the results are similar and available upon request.
Since we are interested in the relationship between a fund’s buy-leading (sell-leading) and its performance, we focus only on stocks that will be part of the fund’s portfolio following the trade decision. Consequently, we do not include terminating sells in our analysis.
Please see Daniel et al. (1997) for details on estimating CS alpha. The DGTW benchmarks are available via http://www.smith.umd.edu/faculty/rwermers/ftpsite/Dgtw/coverpage.htm.
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Acknowledgements
The authors are extremely grateful to Rick Sias for his comments on an earlier version of the paper and to seminar participants at Northeastern University.
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Popescu, M., Xu, Z. Leading the herd: evidence from mutual funds’ buy and sell decisions. Rev Quant Finan Acc 50, 1131–1146 (2018). https://doi.org/10.1007/s11156-017-0656-7
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DOI: https://doi.org/10.1007/s11156-017-0656-7