Mutual Fund Herding and Dispersion of Analysts' Earnings Forecasts

Abstract

We examine the relation between herding of mutual funds and dispersion of analysts' earnings forecasts to ascertain whether it is the lack of information or the arrival of correlated information that induces herding. Results show that the level of herding in individual stocks is positively related to the dispersion measure. Herding is also related to other information quality variables such as stock return volatility and analyst coverage. Our results suggest that fund managers herd in response to lack of reliable information, rather than to exploit correlated fundamental information. Although market capitalization and trading volume are also related to herding, they seem to capture the firm characteristic to which mutual funds are attracted to (or repelled from). Our evidence indicates that buy- and sell-herding respond asymmetrically to information uncertainty. Sell-herding is more prevalent and is positively related to forecast dispersion. Buy-herding, on the other hand, is not related to dispersion. The asymmetric relationship between herding and information uncertainty is consistent with the prospect theory and sharing-of-the-blame under bad news.