Institutional herding, business groups, and economic regimes: evidence from Japan

Abstract

To gain new and important insights into institutional herding, we study Japan for the following reasons: we can examine a market that is known for its active institutional investors, we can investigate the impacts of business grouping (i.e., the keiretsu), and we can see if herding and feedback trading behaviors differ under three distinct economic regimes (i.e., a regulated period, a bubble economy, and a bear market). We argue that the culture in Japan causes institutions to have both a long-term focus and close relationships with mana&ement. We hypothesize that this environment (1) causes institutions to act as a stabilizing force in the market and (2) allows for access to private information that is profitable. Our results are consistent with both hypotheses. For example, herding occurs at a lower level in Japan than in the U.S. In contrast to the U.S., Japanese institutions are not positive feedback traders. Japanese institutional trading appears to predict future returns to a much larger degree than in the U.S. This is even more pronounced for keiretsu firms. Lastly, institutional herding behavior is dependent on the economic regimes.