Investigation of Herding Behaviour in Developed and Developing Countries: Does Country Governance Factor Matters?

Abstract

Although numerous studies have been conducted on herding behaviours, only a limited number has focused on the governance factor that may influence herding activity. This paper examines whether countries’ governance influences herding decisions among investors. Applying the cross-sectional absolute deviation (CSAD) method on data from 60 countries, the results on herding estimation based on the country level segmented into three panels reveal that the strict governance would help to minimize herding activity. Among countries with strict governance, only six report herding activity. However, the results show that herding activity is reported more often in countries with moderate or weak governance. Our results also suggest that herding activity will be practiced more in the country where the information dissemination is less efficient due to its less-strict governance level.