Review of Quantitative Finance and Accounting, 23: 5–17, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Institutional Herding in the ADR Market
DIANE DEQING LI
Assistant Professor of Finance, University of Maryland Eastern Shore, Department of Business,
Management and Accounting, Princess Anne, MD 21853, USA. Tel.: (410) 6516523; Fax: (410) 6516529
Professor of Finance, Old Dominion University, College of Business & Public Administration,
Norfolk, VA 23529, USA. Tel.: (757) 6833501; Fax: (757) 6835369
Abstract. This study examines institutional herding in the ADR market between 1985 and 1998. We ﬁnd a
signiﬁcant positive relation between changes in institutional ownership and ADR returns over the same period.
The positive relation persists after we control for the momentum effect in the US stock markets. We also ﬁnd
that in the ADR market, past winners (losers) in the herding period continue to be the winners (losers) in the
post-herding period. The lack of a returns reversal suggests institutional herding is related to momentum trading.
However, the positive relation between institutional ownership changes and ADR returns remains after controlling
for momentum trading in the ADR market. Our results also rule out that positive feedback trading is related to
institutional herding in the ADR market.
Keywords: institutional herding, ADR, momentum trading, positive feedback trading
JEL Classiﬁcation: G14, G24
In ﬁnance, herding refers to buying or selling the same stock at the same time (Lakonishok,
Shleifer and Vishny, 1992; Grinblatt, Titman and Wermers, 1995). Extant studies mainly
take two paths. One path studies individual investors herding and the other path studies
institutional investors herding. Despite it is generally hypothesized that herding is more
prevalent among institutional investors than among individual investors because of the for-
mer group’s access to more information (e.g., Scharfstein and Stein, 1990; Welch, 1992;
Banerjee, 1992; Bikhchandani, Hirshleifer and Welch, 1992), empirical results have been
inconclusive. Lakonishok, Shleifer and Vishny (1992) examine the holdings of over 700
pension funds and ﬁnd the pension managers do not strongly engage in herding. Grinblatt,
Titman and Wermers (1995) examine 274 mutual funds over a 10-year period and con-
clude that there is only weak evidence that the funds tended to buy and sell the same
stocks at the same time despite most of them were momentum investors. Wermers (1999)
analyzes the trading activity of the mutual fund industry from 1975 through 1994 and
ﬁnds little herding in average stocks. Recently, Sias (2004) reports evidence of institutional