THE DISPOSITION EFFECT, ESCALATION OF COMMITMENT AND HERDING BEHAVIOR OF MUTUAL FUND MANAGERS

Abstract

This paper investigates the relationship between deposition effect and escalation of commitment and herding behavior. First, this paper ranks the mutual fund into five groups by herding style, and we examine deposition spread (DISP) and escalation of commitment dispread (ESCA) zero investment portfolios in each herding style portfolio. Then, we investigate whether the paper gain ratio or paper loss ratio impacts on herding behavior after controlling other characteristics. Our results can be summarized as follow: First, deposition effect and escalation of commitment has negative impact on mutual fund performance. Second, in buy herding style fund, the deposition effect and escalation of commitment has the most negative impact on performance, however, in sell herding style fund, the negative effect disappears. Finally, we find the deposition effect indeed impacts the herding behavior.