On mutual fund herding

This study examines several issues related to mutual fund herd behavior. First, a unifying and consistent framework for measuring herd behavior is developed. This framework generates portfolio-level measures for each fund manager over each quarter, and relates herd behavior to other aspects of portfolio dynamics. Simulations indicate significant and persistent non-random herd behavior. Second, mechanisms that potentially underly herd behavior are tested. Empirical results indicate that herding funds tend to i) change their holdings towards levels similar to peers, ii) have less experienced managers, and iii) underperform their peers. These results are consistent with a career concerns theory of herding. Third, the impact of mutual fund herding on stock liquidity is examined. Empirical results indicate that herd behavior can lead to correlation in stock-level liquidity.