Mutual Fund Herding and Price Discovery – Evidence from an Emerging Market

Abstract

In this paper, we directly investigate the impact of mutual funds’ herding behavior on the price discovery process by using a VAR test procedure, which simultaneously and sequentially tests the multiple hypotheses of the return dynamics. Results show that mutual funds’ herding contains information in the sense that stocks that mutual funds herd tend to adjust information faster than stocks that mutual funds do not herd. This implies that mutual fund managers herd on new information about the firms’ future prospects and will expedite the incorporation of information into stock prices. Furthermore, we also find that mutual funds’ herd buying contains more information than their herd selling behavior. Finally, we evidence that without herding mutual fund managers may still exhibit their private information via their act of trading.