Herd Behavior and Investment: Reply

In this paper, I analyse the reciprocal social in uence on investment decisions within an international group of roughly 2,000 mutual fund managers who invested in companies in the DAX30. Using a robust estimation procedure, I provide empirical evidence that the average fund manager puts 0.69% more portfolio weight on a particular stock, if his peers on average assign a weight to the corresponding position which is 1% higher compared to other stocks in the portfolio. The dynamics of this in uence on the choice of portfolio weights suggest that fund managers adjust their behaviour according to the prevailing market situation and are more strongly in uenced by others in times of an economic downturn. Analysing the working locations of the fund managers, I conclude that more than 90% of the magnitude of in uence stems from the social learning. While this form of in uence varies much over time, the magnitude of in uence resulting from the exchange of opinion is more or less constant. 1 This corresponds to one third of the global investable equity opportunity set. 2 Hence, mutual fund managers' overall investment behaviour might have a considerable impact on the dynamics of stock prices, as similar investment decisions might drive prices into a speci c direction. In this context, it is important to point out how analogous decisions arise. Mutual fund managers are institutional investors with similar investment strategies, such that it is likely that they independently make the same decisions. However, they might also in uence each other such that subsequently investment decisions are aligned.There is a large body of nancial literature that provides empirical evidence in favour of the latter explanation, i.e. social in uence among mutual fund managers (see e.g. Hirshleifer and Teoh (2008) for a recent survey). Social in uence exclusively refers to the situation where fund managers directly inuence each other. This is opposed to indirect in uence that for instance arises via market price mechanisms. The empirical literature on social inuence among mutual fund managers can be divided into two main strands depending on how fund managers learn about other fund managers' investment decisions. Observational in uence, also known as social learning, is generally stated by the strand of literature that deals with herding behaviour (see e.g. Lakonishok et al. (1992), Wermers (1999), Walter and Weber (2006) 111 exchange of opinion, also known as word-of-mouth e ect 3 (see e.g. Shiller and Pound (1989), Hong et al. (2005) and Pareek (2011)).,With this paper, I contribute to both strands of literature by empirically determining the whole magnitude of social in uence among fund managers and dividing it into observational in uence and in uence from the exchange of opinion afterwards. Irrespective of the way the in uence takes place, I allow it to be heterogeneous among fund managers. This means I do not assume that a single fund manager is equally in uenced by all other fund managers.As a major contribution, I relate both observatio...

Section: In His Famous Bookmentioning

confidence: 99%

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confidence: 99%

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confidence: 99%

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Fluctuations of Social Influence: Evidence from the Behaviour of Mutual Fund Managers During the Economic Crisis 2008/09

König

2012

“…As a result, if the reform is not implemented today, it will not be implemented tomorrow. 8 See Rogoff and Sibert (1988), Rogoff (1990), Coate and Morris (1995), Holmstrom and Ricart I Costa (1986), Prendergast and Stole (1996), Morris (2001) and Scharfstein and Stein (1990). 9 See Aghion and Bolton (1990), Milesi-Ferretti and Spolaore (1994) and Besley and Coate (1998).…”

Section: Related Literaturementioning

confidence: 99%

Blame-Game Politics in a Coalition Government

Déllis

2004

An important question in political economics concerns delays in the adoption of socially beneficial reforms. The present paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decisionmaking process, nor the policy preferences of the politicians. It shows that a governing party favoring a reform may nonetheless choose to veto its adoption and blame its coalition partners for the non-adoption. This is referred to as blame-game politics. The rationale for playing such a game is to prevent some parties from acquiring a better reputation as supporters of the reform. At a more general level, the argument applies to situations where several agents, whose types are private information have each to take an action while the principal observes only the aggregate outcome.

“…Therefore, they seek to obtain research advantages from few other analysts who are familiar due to geographical proximity or with whom they exchange their opinions. However, during an economic downturn which generally induces a high uncertainty, they try not to deviate too much from the overall average in order to limit the potential loss (Scharfstein andStein, 1990, Clarke andSubramanian, 2006).…”

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confidence: 99%

Analyst Behaviour: The Geography of Social Interaction

König

2012

In this paper, I provide empirical evidence that an analyst working in Germany is more likely to publish a high (low) price target regarding a DAX30 stock when other Germany based analysts are also optimistic (pessimistic) about the same stock. This e ect of geographical proximity is not biased by the fact that DAX30 companies are headquartered in Germany. Shedding light on how in uence takes place, I show that inuence through communication and the exchange of opinion within small groups of analysts plays a vital role. This mainly applies during a bullish market environment. When markets are bearish, analysts' incentives induce them not to deviate too much from the overall average, such that then observational learning has a greater impact.