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By DAVID S. SCHARFSTEIN In our 1990 paper, we showed that managers concerned with their reputations might choose to mimic the behavior of other managers and ignore their own information. We presented a model in which âsmartâ managers receive correlated, informative signals, whereas âdumbâ managers receive independent, uninformative signals. Managers have an incentive to follow the herd to indicate to the labor market that they have received the same signal as others, and hence are likely to be smart. This model of reputational herding has subsequently found empirical support in a number of recent papers, including Judith A. Chevalier and Glenn D. Ellisonâs (1999) study of mutual fund managers and Harrison G. Hong et al.âs (2000) study of equity analysts. We argued in our 1990 paper that reputational herding ârequires smart managersâ prediction errors to be at least partially correlated with each otherâ (page 468). In their Comment, Marco Ottaviani and Peter Sørensen (hereafter, OS) take issue with this claim. They write: âcorrelation is not necessary for herding, other than in degenerate cases.â It turns out that the apparent disagreement hinges on how strict a deï¬nition of herding one adopts. In particular, we had deï¬ned a herding equilibrium
American Economic Review – American Economic Association
Published: Jun 1, 2000
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