Investors’ herding practice: do IFRS and national economic culture matter?

Abstract

Purpose

The purpose of this paper is to examine the effect of International Financial Reporting Standards (IFRS) and the moderating role of national economic culture on investors’ herding practices in the European Union (EU) equity markets.

Design/methodology/approach

The study employs and modify two extensively applied herding measures of cross-sectional standard deviation and cross-sectional absolute deviation, using stock return dispersion as a function of aggregate market return as a proxy for herding behavior. The sample period stretches from January 1, 2001 until December 31, 2015.

Findings

The study finds that mandatory IFRS adoption significantly promotes investors’ herding practice in the EU equity markets. However, taking a further look, the results suggest that the new reporting regime seems not to be the only instigator for the observed herding practice; national economic culture, particularly individualism and masculinity, contribute significantly toward investors’ herd-formation around the mandatory IFRS adoption. Overall, it can be concluded that the notion that the adoption of IFRS improves information-based trading and mitigates irrational investment behavior might totally be inaccurate in some instances. For example, in the case of herding bias, the new reporting regime appears to have promoted the phenomenon.

Research limitations/implications

The study employs an approach of herd detection, which explores evidence of herding toward the market consensus. Thus, the results do not in any way exclude the possibility that other types of herding behavior exist in the EU equity markets. Notwithstanding this caveat, the findings of this study would be of special relevance to academics, regulators and policymakers in performing a cost-benefit analysis of the IFRS adoption.

Originality/value

To the researchers’ knowledge, this study is first to explore the nexus between IFRS and investors’ herding practices, while highlighting the role of the national economic culture.

Citation

Danrimi, M.L., Abdullah, M. and Alfan, E. (2018), "Investors’ herding practice: do IFRS and national economic culture matter?", Managerial Finance, Vol. 44 No. 9, pp. 1117-1133. https://doi.org/10.1108/MF-08-2017-0311