INFORMATION ASYMMETRY AND HERDING BEHAVIORINFORMATION ASYMMETRY AND HERDING BEHAVIOR

Puput Tri KomalasariFaculty of Economics and Business Universitas Airlangga

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

Herd

Does herding behaviour exist in Indonesian stock market ?

QUESTIONRESEARCH

Information Asymmetry Does information asymmetry influence herd behavior?

LITERATUR REVIEW

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

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

LOGOBehavioral Characteristics

Loss aversionNarrow framingAnchoringMental

accountingDiversification

Disposition effect

HerdingRegretMedia responseOptimism

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

TYPE OF HERDING

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

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

LOGOHYPOTHESIS

there is no herding behavior in Indonesian Stock Exchange

0-1

information asymmetry have positive influence on herding behavior

2

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

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

LOGOMEASUREMENTS

Market Returns1

Information Asymmetry2

where:

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Basic Model1

MODEL ANALYSIS

Nonlinearity Model2

Impact of Information Asymmetry3

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.

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:

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:

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.