Abstract
The study examines herding behavior in the strategic allocations of UK pension plans. The results show that UK pension managers are involved in cross-sectional herd behavior. The study also examines herding from a quantitative perspective considering the number of managers changing their style allocations and from an intertemporal perspec- tive to examine the tendency of UK pension plans to imitate others over time. Finally, a robustness analysis considering passive style portfolios is applied to eliminate artificial herding. Hence, the paper contributes to the literature by analyzing herding at strategic allocations instead of at the individual stock level as well as by improving the methodol- ogy used to capture the herding phenomenon. The results have practical implications to design managers’ compensation schemes due to their influence on manager behavior.
Highlights
The increasing importance of institutional managers for stock markets has encouraged research on the influence their trading exerts on asset prices
This paper focuses on the herding behavior of UK pension managers, an interesting field of research taking into account the influence of institutional managers on stock markets
We contribute to the literature by studying herding phenomenon through different and complementary analyses
Summary
The increasing importance of institutional managers for stock markets has encouraged research on the influence their trading exerts on asset prices. This interest is due to the belief that institutional herding behavior may have consequences on the stability of financial markets. There are three central questions in the herding literature. Empirical literature has traditionally focused on testing institutional herding in individual securities, the proposed explanations for institutional herding hold at least well at the industry level (Choi, Sias 2009) and at the investment style. The primary goal of the paper is to address the fundamental question: Do institutional pension managers herd across style allocations?
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