Journal of Finance, forthcoming
John R. Graham
Duke University, Durham, NC 27708
ABSTRACT
This paper develops and tests a model that identifies the incentives and economic conditions that lead to herd behavior. The theory implies that if an analyst had high reputation or low ability, or if there is strong public information which is inconsistent with the analyst's private information, she is likely to herd. Herding is also common when the private information observed by informed analysts is highly correlated. The implications of the model are tested using data from analysts who publish investment newsletters. Consistent with the model, the empirical results indicate that a newsletter analyst is likely to herd on Value Line's recommendation if her reputation is high, if her ability is low, or if signal correlation is high.