Fund managers’ herding and mutual fund governance
Abstract
Purpose
The purpose of this paper is to identify the implications of managerial herding for investors’ wealth and capital allocation across funds, and the critical role played by fund governance in monitoring herding incentives.
Design/methodology/approach
The author adopt the fund herding measure first proposed by Grinblatt et al. (1995) over the long sample period 1992-2007. Univariate and multivariate tests are then constructed to examine the relationship between managerial herding, performance, and investors’ sensitivities. OLS, fixed-effect panel data models are utilized to conduct the tests.
Findings
The author show that managers that do not herd have above-average managerial skills, trade less on noise, and significantly outperform herding managers. The author also illustrate that although fund herding could be used as a signal of managerial quality, underperforming herding funds manage to survive in equilibrium, indicating that investor flows do not adequately respond to the information content of a persistent herding behavior. Finally, the author demonstrate that better governance in the form of stronger managerial incentive schemes constitutes a significant deterrent against detrimental herding strategies, representing an effective monitoring device of the response of fund managers to poor flow-performance sensitivity.
Originality/value
The paper provides original evidence on the efficacy of external and internal governance in deterring wealth-reducing herding strategies. The author document that where more effective managerial incentives schemes are put in place by the management companies, fund managers are more likely to be better informed, resulting in fewer incentives to mimic the trading decisions of their peers.
Keywords
Acknowledgements
The author has benefited from helpful comments and suggestions from Nicole Choi (Discussant), Tony Hall, Hardy Hulley, David Michayluk (Editor), Nahid Rahman, Massimo Scotti, and an anonymous referee. The author is especially grateful to Anthony Tooman for providing excellent research assistance. The author would also like to thank seminar participants at the FMA Applied Finance Conference, the FMA Asia Conference, and the Finance and Corporate Governance Conference. Casavecchia gratefully acknowledges the financial support received from the UTS Business School Research Grant, and the Honorarium Award received from the Financial Management Association International.
Citation
Casavecchia, L. (2016), "Fund managers’ herding and mutual fund governance", International Journal of Managerial Finance, Vol. 12 No. 3, pp. 242-276. https://doi.org/10.1108/IJMF-12-2014-0197
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited