The relationship between herding behavior and firm size before and after the elimination of short-sale price restrictions

Chiao Yi Chang; Fu Shuen Shie; Shu Ling Yang; Chiao Yi Chang; Fu Shuen Shie; Shu Ling Yang

doi:10.3934/QFE.2019.3.526

Quantitative Finance and Economics

2019, Volume 3, Issue 3: 526-549. doi: 10.3934/QFE.2019.3.526

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Research article

The relationship between herding behavior and firm size before and after the elimination of short-sale price restrictions

Department of Insurance and Finance, National Taichung University of Science and Technology, Taichung City, Taiwan

Received: 10 June 2019 Accepted: 01 September 2019 Published: 05 September 2019
JEL Codes: C22, G12, G14

The present paper investigates the relationship between investor herding behavior and stock return under short-sale price restrictions. Detailed intra-day orders are applied to calculate herding measurements before and after a staged lifting of short-sale restrictions on May 16th, 2005 and September 23rd, 2013 in Taiwan. The former targeted the constituent stocks of the Taiwan 50 Index only, while the latter targeted all listed firms on the Taiwan Stock Exchange. Using the Chow test and the dynamic structural change point test to confirm the effect of ending these restrictions, the results found that short-sale restrictions increased individual herding behavior in the context of the stocks of small firms, especially those stocks in the low quantile of stock returns. Conversely, herding behavior was not shown to significantly impact the stock returns of large firms either before or after the end of short-sale price constraints for either individual or institutional investors.
- herding behavior,
- short-sale restrictions,
- uptick rule,
- structural change,
- quantile regression
Citation: Chiao Yi Chang, Fu Shuen Shie, Shu Ling Yang. The relationship between herding behavior and firm size before and after the elimination of short-sale price restrictions[J]. Quantitative Finance and Economics, 2019, 3(3): 526-549. doi: 10.3934/QFE.2019.3.526

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Abstract

The present paper investigates the relationship between investor herding behavior and stock return under short-sale price restrictions. Detailed intra-day orders are applied to calculate herding measurements before and after a staged lifting of short-sale restrictions on May 16th, 2005 and September 23rd, 2013 in Taiwan. The former targeted the constituent stocks of the Taiwan 50 Index only, while the latter targeted all listed firms on the Taiwan Stock Exchange. Using the Chow test and the dynamic structural change point test to confirm the effect of ending these restrictions, the results found that short-sale restrictions increased individual herding behavior in the context of the stocks of small firms, especially those stocks in the low quantile of stock returns. Conversely, herding behavior was not shown to significantly impact the stock returns of large firms either before or after the end of short-sale price constraints for either individual or institutional investors.

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