On the herding behavior of fund managers in the Korean stock market

초록

Given that the relative importance of trades by institutional investors in Korea increases due partly to the considerable growth in the subscription of installment funds by individual investors in the recent surge of stock market, it would be worthwhile to examine fund managers' trading behavior and its impact on stock prices. The growing influence of institutional and foreign investors has drawn the attention of the government, practitioners and academics because these investors might potentially destabilize the stock market by excessively either buying or selling the same stock at the same time. With awareness of such potential risk, the media and security brokerage firms generally report the aggregate purchase amounts of the stocks by investor types on a daily basis (even on a real-time basis). In spite of the fact that funds have played an important role in the Korean stock market, however, there have been only few studies, to the best of our knowledge, on the herding behavior of fund managers in Korea. It seems to be due mainly to the unavailability of stock holding data by the funds. In this context, this paper can contribute to the research on the trading behavior of fund managers in Korea. In contrast to the previous studies on their trading behavior in other countries such as the United States, Japan and UK which utilize the quarterly ownership data, we use the monthly stock holding data of each funds. By doing so, we are able to provide new evidence on (.) the role of shorter term (i.e., monthly) price movements in the trading behavior of fund managers based on the shorter-interval data. The specific research issues addressed in this paper can be summarized as follows. First, we try to investigate whether fund managers in Korea actually show the herding behavior when they trade, in comparison with the results based on the U.S. and Japanese fund data by the previous studies which found relatively weak evidence of herding by fund managers (see Grinblatt, Titman, and Wermers, 1995; Kim and Nofsinger, 2005). If fund managers have a tendency to herd, the next question to be addressed would be whether the degree of herding is symmetric between buying stocks and selling stocks. Second, the informational cascades model predicts that herding is more likely to occur when private information is more difficult to obtain and to evaluate due to uncertainty. It suggests that the small capitalization stocks whose precise information about fundamentals is not readily available might have higher herding measures. To obtain potential explanation for this conjecture, we examine degrees of herding in subgroups of stocks classified by market capitalizations. Third, we want to evaluate the fund performance in the context of herding if the herding behavior of the fund managers is associated with future returns, contemporaneous returns, and past returns. The data used in this study come from two sources. The monthly stock holding data of the funds, Which cover. the periods from January 2002 to May 2005, are obtained from Zeroin Inc. All the other data such as the monthly stock returns, market capitalizations of the firms, book value per share, and market returns are from FnGuide, Inc. This study includes only equity funds, excluding bond funds and mixed type funds. Our results can be summarized as follows. First, fund managers in Korea herd more substantially than those in other countries as reported in the previous literature. Our average herding measure was 26.56% whereas Wermers (1999) reports that the average herding measure for the set of U.S. funds during the periods from 1975 to 1994 was 3.61%. As pointed out by Choe, Kho, and Stulz (1999), the large discrepancy in the herding measures between U.S. and Korean fund managers may result from the time intervals of the data (i.e., monthly frequency in our dataset versus quarterly frequency in Wermers's dataset) in measuring the degree of herding. Second, we find weak evidence of momentum strategy that fund managers tend to buy past winners and sell past losers over our period of study. Third, the concurrent relation between the degree of the herding by fund managers and stock returns is positive from the buy side of trades and is negative from the sell side of trades. However, the relation is asymmetric in magnitude in that the impact to the contemporaneous monthly returns of herding from the buy side is larger than that of herding from the sell side. Fourth, the trading behavior of fund managers is not associated with future returns, which suggests that the impact of the herding behavior of fund managers is not significant in predicting future price movements and/or is not detrimental to the market stability.

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