The existence and motivations of irrational loan herding and its impact on bank performance when considering different market periods

Hao Fang, Yang-Cheng Lu, Joseph.C.P. Shieh and Yen-Hsien Lee

International Review of Economics & Finance, 2021, vol. 73, issue C, 420-443

Abstract: This study first investigates whether Taiwanese banks exhibit irrational loan herding after rational herding factors based on industrial growth, profitability and credit rating are controlled in the model of total loan herding. Our results confirm the evidence of irrational loan herding for most types of banks except for government-owned banks (GOBs). Compared with other periods, the irrational herding behavior of small banks during the crisis and expansionary periods is significantly greater, and the irrational herding behavior of GOBs during the presidential election period is significantly greater. We then clarify the motivations behind irrational loan herding, including characteristic herding and investigative herding. Next, we detect the impact of irrational loan herding on bank performance. We find that the irrational loan herding of POBs, independent banks and small banks has more significantly negative impacts on their performance than does the irrational herding of their counterpart banks. Finally, we investigate whether irrational loan herding during specific market periods has a more significantly harmful effect on bank performance. Our results show that there is a greater negative impact of irrational loan herding by privately owned banks than by GOBs on bank performance during the crisis and expansionary periods, while the situation is the opposite during the presidential election period.

Keywords: Loan herding; Irrational herding; Bank; Performance impact; Financial crisis (search for similar items in EconPapers)
JEL-codes: C21 D03 G02 G21 G4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056021000150
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:73:y:2021:i:c:p:420-443

DOI: 10.1016/j.iref.2021.01.015

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().