Academic journal article Journal of Management Information and Decision Sciences

The Impact of Corporate Investment Behaviour on the Corporate Performance: Evidence from an Emerging Market

Academic journal article Journal of Management Information and Decision Sciences

The Impact of Corporate Investment Behaviour on the Corporate Performance: Evidence from an Emerging Market

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Theories on herding bias find corporate managers usually follow the financial experts in their trading behavior instead of relying their own source of information (Bikhchandani et al., 1992). The study of Garber (2001) find herding behavior the most prominent bias in the psychology of judgment. In the recent past, the studies on investment herding behaviour present the diverse behavioral pattern across the world. Decision making in investment often includes conflicts in information and subjective judgment of the investors and managers behaviours. Corporate investment behavior has increased importance in the recent corporate literature. Usually corporate managers found biased in their investment decision because of securing their good reputation. During their financial decision, managers exhibits many biases among them, following their peers of the other firm in the same industry is most common bias (Garber, 2001). Investment herding in the tendency of corporate managers to follow the peers or financial analysist in their financial decision. The question is why agents mimic the decisions of others from different aspects? Devenow and Welch (1996) provide a summary of different herding mechanisms among them the career reputation concerns or the information cascade theory is the main source of motivations for CEOs and directors to mimic the investment behavior of their peers. Reputational herding occurs when the decision-maker mimics the decisions of others due to the concern that it is always safe in preserving or gaining reputation by being in the crowd. Most important career concern regarding CEOs and directors is to avoid damage to their reputation in the external market.

Fong et al. (2004), Theories on herding bias find corporate managers usually follow the financial experts in their trading behaviour instead of relying their own source of information (Bikhchandani et al., 1992). The studies of Garber (2001) find herding behaviour the most prominent bias in the psychology of judgment. In the recent past, the study on investment herding behaviour presents the diverse behavioural pattern across the world.

Fong et al. (2004) outline four general theories (first two theories for intentional herding and last two for unintentional herding) as to why corporate managers may engage in herding behaviour:

1) Corporate managers are subject to reputational risk when they behave differently from the crowd, thus they may ignore private information to trade with the herd.

2) Managers may infer the private information of rival managers (perceived on their prior trades), resulting in the formation of informational cascades.

3) Corporation managers may also receive similar private information because they aslo examine the same priced factors which causing them to arrive at similar conclusions regarding individual stocks.

4) Corporation managers may exhibit similar aversions to stocks exhibiting particular characteristics, such as low liquidity or low analyst coverage.

In U.S. and Europian market, corporate herding behaviors among corporate managers of different institutes are different. Choi and Sias (2009), document strong institutional herding bias in U.S corporations. Also, Walter and Moritz (2006), pinpoint the herding behavioral bias of mutual fund managers in Germany. A South Korea, Taiwan and China market also exhibits herding behavior (Chang et al., 2000; Chiang et al., 2010).The relationship between managerial career concerns and herding is examined by many scholars. Devenow and Welch (1996) analytically illustrate herd behavior in making corporate investment decisions.

Bo et al. (2013), explain investment herding behavior among corporate director, boards, and managers, and this behavior positively influence on the corporate performance of Chinese listed firms.

Prior literature on herding behavior has versatile information about investor behavior in the stock market individually and collectively. …

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