Newcastle University Business School

Event Item

Herding and the Sentiment - Return Relationship: An International Examination of the Impact of Regulatory Change and Culture

A joint Behavioural Research in Finance and Finance, Accounting, Control & Evaluation PhD research seminar

Date/Time: Wednesday 5 April, 12.00-13.30

Venue: Room 4.23, Newcastle University Business School

Speaker: Samah El Hajjar

Thesis overview:

This thesis aims to study two prominent phenomena in behavioral finance, namely the effect of sentiment and herding, from various perspectives.

This dissertation takes an original approach by studying how the roles of sentiment and herding have changed after the adoption of one of the most important accounting standards which is the International Financial Reporting Standards (IFRS). IFRS aims at enhancing the quality of financial reporting, increasing corporate transparency and improving the comparability of financial reporting among firms (Daske et al, 2008). It goes without saying that sentiment reflects the market mood. In order for sentiment to have a role in stock markets a certain form of herding should exist. Herding occurs when investors neglect their own beliefs and base their investment decisions on the overall market actions even if it contradicts their own beliefs (Christie and Huang, 1995). In this context, Chang et al. (2000) identifies two types of herding. The first view of herding explains that herding might arise from psychological biases as investors thoughtlessly mimic other investors’ behaviors. On the other hand, the rational view of herding suggests that herding may be related to information asymmetry, as it can be a response to information conveyed by more sophisticated investors. Accordingly, if IFRS has been effective at achieving its aims, herding arising from investor asymmetry (research question one) is expected decrease and so does the effect of sentiment in stock markets (research question two).

A second aim of this dissertation is to construct, using the Baker and Wurgler (2006) method, sentiment indices for an international sample of countries and test the effect of these indices on the market returns of these countries. Moreover, it aims to separate the global sentiment component from the local one. This would open the window for investigating how the market returns can be affected by the global sentiment mood especially during the world financial crisis.  Finance literature has also highlighted a role of culture in explaining the variation of the effect of sentiment across countries (Schmeling 2009; Chang et al. 2009; Corredor et al. 2013).  Chui et al. (2010) highlight the possibility that investors in less individualistic cultures are more likely to value census opinions and might be more prone to herding. Accordingly, the thesis contributes to this field of research by examining the variation of sentiment-return relationship for a set of Asian countries characterized by low individualism level (research question three).

About the speaker:

Samah is a PGR student and member of BRiF.  She is investigating how investor herding and the effect of sentiment on stocks' returns vary across different cultures and whether these phenomena change after the adoption of international financial reporting and transparency standards.