Investors’ Herding on the Tokyo Stock Exchange

Yoshio Iihara, Hideaki Kiyoshi Kato and Toshifumi Tokunaga

International Review of Finance, 2001, vol. 2, issue 1‐2, 71-98

Abstract: Herding occurs when a group of investors intensively buy or sell the same stock at the same time. This study examines the tendency of individual, institutional and foreign investors to herd in Japan, where the yearly change in ownership is used as a proxy for investor herding. Using 20 years of aggregate data, we examine how investor herding is related to stock return performance around the herding interval. Both institutional and foreign investor herding impact stock prices. Further, Japanese institutional investors seem to follow positive‐feedback trading strategies, and subsequent return reversals imply that these investors’ trades destabilize stock prices. On the other hand, foreign investors’ trades are related to information. Our results are robust to the effect of firm size, to portfolio formation methods, to initial ownership levels, and to the chosen time period.

Date: 2001
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