Herding Behaviour in Investors: A Study of Tadawul Financial Market

Abstract

Purpose: The study investigates herding behaviour in the Tadawul stock exchange based on daily data between the years 1999 to 2019 .   Theoretical framework: Existence of uncertain situations affect the confidence level of the investor. This leads to investors changing their approach from rational to behavioural wherein they prefer to follow the judgements of others, thus engaging in herding behaviour. Several factors such as institutional investment,  external factors and  fundamental factors impact herding behaviour.   Methodology: The study uses OLS regression approach and accounts for the various factors such as institutional investment (percentage ownership in a stock, institutional ownership type, nationality) , external factors (global financial crisis, political instability, oil market volatility) and fundamental factors (P/E ratio, Share Turnover, Market Capitalization, Market Liquidity).   Findings: The empirical results indicate that herding is not present during the period of study. External factors and fundamental factors do not significantly impact the Cross-Sectional Absolute Deviation (CSAD) and there is no evidence of herding when accounting for these variables. However, CSAD is significantly impacted with the percentage of institutional investment, ownership and the nationality of institutional investors and there is evidence of herding when accounting for these variables.   Research Implications: As further scope the study proposes that the length of the time period may affect the findings and more robust analysis can be conducted by structural break models to understand the relative significance of the factors that may lead to herding during different time periods.   Originality: Institutional investment related factors have a significant impact on Herding behaviour of investors in the Tadawul stock exchange.