Information Asymmetry and Herding Behavior
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INFORMATION ASYMMETRY AND HERDING BEHAVIORINFORMATION ASYMMETRY AND HERDING BEHAVIOR
Puput Tri KomalasariFaculty of Economics and Business Universitas Airlangga
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BACKGROUND OF STUDY
Chang, Cheng and Khorana (2000): higher level of herding in
emerging markets
Indonesia is emerging markets
There is 60% foreign investor in ICM
Local investor tend to herd foreign investor
Information asymmetry
HERDHERDBEHAVIORBEHAVIOR
HERDHERDBEHAVIORBEHAVIOR
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Herd
Does herding behaviour exist in Indonesian stock market ?
QUESTIONRESEARCH
Information Asymmetry Does information asymmetry influence herd behavior?
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LITERATUR REVIEW
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Standard Theory of Finance
Investors Are rational beings Consider all information and accurately assess
its meaning Some individuals/agents may behave
irrationally or against predictions, but in the aggregate they become irrelevant.
Markets Quickly incorporate all known information Represent the true value of all securities
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Investors Are not totally rational Often act based on imperfect information There are systematic patterns or cognitive
errors that do not go away in the aggregate, such that there is a positive probability that the ‘marginal investor’ will exhibit a cognitive bias.
Markets May be difficult to beat in the long term In the short term, there are anomalies and
excesses
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LOGOBehavioral Characteristics
Loss aversionNarrow framingAnchoringMental
accountingDiversification
Disposition effect
HerdingRegretMedia responseOptimism
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WHAT IS HERDING BEHAVIOR?
Individuals who suppress their own beliefs and base their investment decisions solely on the collective actions of the market, even when they disagree with its prediction (Christie and Hwang, 1995)
Herding may arise when payoffs are similar even if initial information is not.
Here people communicate with each other or observe the actions of others—or the consequences of these actions
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Company Logo
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TYPE OF HERDING
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REASON FOR HERD
RATIONAL HERDINGRATIONAL HERDINGRATIONAL HERDINGRATIONAL HERDING
When investors:
has no private
information
hesitated with the
quality of the
information
other people to process
information is
better
other investors have better information
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Herding behavior occurs when knowledge about investment decisions of other investors have changed their investment decisions
Motivation of herding behavior:◦ Investment managers and financial analysts is
required to maintain their career and reputation Kallinterakis (2009) found that phenomenon
of herding behavior in the thin markets are caused by illiquidity of market structure
Degirmen, Pabst and Songür (2012) stated that herding behavior is more common in developing markets due to relatively low of information precision
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LOGOHYPOTHESIS
there is no herding behavior in Indonesian Stock Exchange
0-1
information asymmetry have positive influence on herding behavior
2
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Sampling
Variables
• This study used companies that are listed in Indonesian Stock Exchange
• The period of study is 2008
• Dependent variable: dispersion of returns• Independent variable: market returns• Moderating variable: information asymmetry
RESEARCH METHODOLOGY
15
Measure Herding Behavior
• As per rational asset pricing model, the relationship between the absolute value of the market return and equity return dispersion is positive because investors obtain different information and have different expectations about the market
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Chang et., al. (2000)’s approach
Christie and Huang’s approach
(1995)
Saumitra’s approach
(2012)
Saumitra’s approach
(2012)
Herding Behavior proxies
CSSD CSAD
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LOGOMEASUREMENTS
Market Returns1
Information Asymmetry2
where:
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Basic Model1
MODEL ANALYSIS
Nonlinearity Model2
Impact of Information Asymmetry3
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RESULT—DESCRIPTIVE Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
AbsAI 240 .00009 1.01485 .0674191 .13626534 AbsRm 240 .00014 .10375 .0170265 .01831267 CSAD 240 .01636 .09039 .0292555 .00949638 CSSD 240 -.01982 .11725 .0420782 .01693848 240 -.02650 .02561 .0041589 .00679759 ModAI 240 .00000 .00444 .0001279 .00057964 Rm 240 -.10375 .07921 -.0024155 .02491204 Rm2 240 .00000 .01076 .0006239 .00140448 Valid N (listwise) 240
Return dispersion as measured by the CSSD, CSAD and indicates
that the CSSD have higher value than the others. This indicates that the CSSD provides a widest measure of return dispersion, while is the smallest. This could be due to the majority of the
median value of the average daily return is zero, so the value of will be close to the average value returnnya.
Return dispersion as measured by the CSSD, CSAD and indicates that the CSSD have higher value than the others. This indicates that the CSSD provides a widest measure of return dispersion, while is the smallest. This could be due to the majority of the
median value of the average daily return is zero, so the value of will be close to the average value returnnya.
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LOGOHERDING BEHAVIOR TEST
Unstandardized
Coefficientst Sig.
Unstandardized
Coefficientst Sig.
Unstandardized
Coefficientst Sig.
(Constant) .000 -.010 .992.000 .048 .962 .000 .036 .971
ABSRm -.318 -3.052 .003 -.147 -2.646 .009 -.099 -1.755 .081Rm2 5.868 4.462 .000 4.042 5.764 .000 1.315 1.845 .066RR SquareF ValueF Sig.
12.781 35.585 1.720.000a .000a .181a
0.313 .481a .120a.098 .232 .014
Table 4.2. Herding Behavior Test
Variable
Dependent Variable: CSSD Dependent Variable: CSAD Dependent Variable:
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LOGOINFORMATION ASYMMETRY EFFECT
Unstandardized
Coefficientst Sig.
Unstandardized
Coefficientst Sig.
Unstandardized
Coefficientst Sig.
(Constant) .000 -.003 .998 .000 .071 .944 .000 .040 .968ABSRm -.275 -2.565 .011 -.088 -1.616 .107 -.119 -2.083 .038Rm2 5.338 3.542 .000 3.337 4.375 .000 2.443 3.045 .003AI -.027 -1.624 .106 -.038 -4.466 .000 .010 1.165 .245AI*Rm2 3.582 .919 .359 4.844 2.456 .015 -5.362 -2.584 .010RR SquareF ValueF Sig.
7.405 27.442 3.998.000a .000a .004a
.335a .565a .253a.112 .319 .064
Tabel 4.3. Herding Behavior Test: Effect of Information Assymmetry
Model
Dependent Variable: CSSD Dependent Variable: CSAD Dependent Variable:
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CONCLUSION
higher the information asymmetry between informed traders and uninformed traders
pushed return dispersion lower
high information asymmetry is thought to have an influence on the herding behavior
Consistent with Christie and Huang (1995) who found no herding behavior in the U.S. capital markets during the periods of high
market volatility
there is no phenomenon of herding behavior of investors in the Indonesian Stock Exchange in
2008.
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