Herding behavior of institutional investors in Romania. An empirical analysis

Institutional herding is a quite common topic in the empirical literature. During the last decades, institutional investors (such as mutual funds, pension funds, banks or insurance companies) have been the main players both in developed as well as in emerging stock markets. Thus, their investment behavior was analyzed at the national or international level, in order to assess if institutional investors herd, increase stock return volatility, affect market efficiency and liquidity, affect the corporate governance, or destabilize stock prices. Herding is the behavior that consists of imitating other' actions; in the stock markets it means similar portfolio investment structures. Herding is believed to be a quite common practice in the stock market, which is mainly responsible for the abnormal distribution of stock returns. This paper studies the relationship between corporate disclosure and level of investments for institutional investors on the Romanian stock market, a European frontier market that struggles to attain the status of emerging market. We examine if the disclosure level generates any herding behavior for institutional investors, due to fundamental analysis (which takes into account the company’s revenue, expenses, assets and liabilities, etc. in order to evaluate a security's value), rather than the use of the technical analysis (where the decision to invest is based mainly on market activity, such as past prices and trading volume). In emerging markets, the lack of transparency affects the degree of investments in a listed company, as long as insider trading is pushed to the limit of the legal line. Secondly, we determine the impact of information asymmetry on herding behavior, considering the measure of bid-ask spread. For this study we used financial information from the companies listed on the Bucharest Stock Exchange, including the types of stakeholders, the bid-ask spread and the returns. The findings highlight the importance of corporate disclosures in reducing information asymmetry, and that there is a herding behavior among institutional investors in Romania.