INFORMATION ASYMMETRY

AND HERDING BEHAVIOR

Puput Tri Komalasari

Faculty 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

HERD
BEHAVIOR

There is 60% foreign investor in ICM

Local investor tend to herd foreign
investor
Information asymmetry

QUESTION
RESEARCH
Herd
Does herding
behaviour exist in
Indonesian stock
market ?

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

Behavioral Characteristics
Loss aversion
Narrow framing
Anchoring
Mental
accounting
Diversification

LOGO

Disposition effect
Herding
Regret
Media response
Optimism

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
RATIONAL HERDING
HERDING

When investors:

has no
private
information

hesitated
with the
quality of
the
informati
on

other
people to
process
informati
on 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 Songr (2012) stated
that herding behavior is more common in
developing markets due to relatively low of
information precision

HYPOTHESIS

0-1

there is no herding behavior in

Indonesian Stock Exchange
information asymmetry have positive
influence on herding behavior

LOGO

RESEARCH METHODOLOGY
Sampling

This study used companies that are listed in

Indonesian Stock Exchange
The period of study is 2008
Variables

Dependent variable: dispersion of returns

Independent variable: market returns
Moderating variable: information asymmetry
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
15

Herding Behavior proxies

CSSD

CSAD

Christie and
Huangs
approach
(1995)

Chang et.,
al. (2000)s
approach

Saumitras
approach
(2012)

MEASUREMENTS
1

Market Returns

Information Asymmetry

where:

LOGO

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MODEL ANALYSIS
1

Basic Model

Nonlinearity Model

Impact of Information Asymmetry

RESULTDESCRIPTIVE
Descriptive Statistics
N
AbsAI
AbsRm
CSAD
CSSD

ModAI
Rm
Rm2
Valid N (listwise)

Minimum Maximum
240
240
240
240
240
240
240
240
240

.00009
.00014
.01636
-.01982
-.02650
.00000
-.10375
.00000

Mean

1.01485 .0674191
.10375 .0170265
.09039 .0292555
.11725 .0420782
.02561 .0041589
.00444 .0001279
.07921 -.0024155
.01076 .0006239

Std. Deviation
.13626534
.01831267
.00949638
.01693848
.00679759
.00057964
.02491204
.00140448

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.

HERDING BEHAVIOR TEST

LOGO

INFORMATION ASYMMETRY
EFFECT

LOGO

CONCLUSION
there is no phenomenon of herding behavior of
investors in the Indonesian Stock Exchange in
2008.

Consistent with Christie and Huang (1995)

who found no herding behavior in the U.S.
capital markets during the periods of high
market volatility

high information asymmetry is thought

to have an influence on the herding behavio
higher the information asymmetry between
informed traders and uninformed traders
pushed return dispersion lower