Characteristics of Stocks and Individual Investor Herd Behavior: A Causal-Comparative Study

Tze Sun Wong, Walden University


Some individual investors follow institutional investors in trading, a phenomenon called herding, that leads to excess market volatility and mispriced stocks. Individual investors who herded suffered from inferior investment performances and monetary losses, and the impact is broader in an individual investor dominant market such as Taiwan. Behavioral finance is the theoretical base of herd behavior. The purpose of this causal-comparative study was to examine individual investor herd behavior as related to characteristics of stocks in the Taiwan stock market. The research questions addressed what differences in individual investor herd behavior, if any, existed by market capitalization, price-to-book (P/B) ratio, and industry affiliation. The target population was the individual investors who traded in Taiwan Stock Exchange (TWSE) between January and December 2016. Participants were a purposive sampling of the target population with the exclusions of individual investors who traded illiquid stocks or exchange sanctioned stocks only. Data were collected through a subscription of TWSE data. The extent of individual herding estimated with Lakonishok, Shleifer, and Vishny's measure was 0.04. The 3 characteristics of stocks were separately and as a whole related to individual herding. The findings confirmed more serious sell-herding than buy-herding. The result from the logistic regression extended the knowledge of more serious herding in low P/B ratio stock with other variables controlled and different extents of herding by industry affiliation. The findings may improve individual investor financial literacy that may result in the positive social change of the alleviation of both herding and inferior investment performance.