A Micro-Level Evidence of how Investor and Manager Herding Behavior Influence the Firm Financial Performance

Using the investor-herding index (IHRB) and manager-herding index (MHRB), the emergence of investors' and managers' herding behavior at the corporate-level and its potential impact on firm financial performance (FFP) is analyzed in the entire study. The study utilizes the micro-level data of 296 listed firms of Pakistan stock exchange (PSX) from 2013 to 2017. Empirical findings show that the investors' and managers' herding significantly affect FFP. The results are robust under alternative measurements of FFP. This study has a unique contribution to the literature on behavioral finance by addressing the astonishingly overlooked phenomena of firm-level biases and their potential impact on FFP. For prospective investor's decision, the findings are significant in such way that the market index is irrelevant than the firm-level financial evidence. Explicitly, the study concludes that positive herding behavior is elucidated by the bullish trend and inverse herding behavior of investors with respective to firm value leads toward bearish trend of stock market index. The likelihood of market crash may become more stringent in circumstances once managers and investors interactively exhibit negative herding behavior. Thus, the study offers useful policy and strategy implications for the associated stakeholders to the device the policies accordingly.JEL Code: D9, D21, D91, G11. To examine the impact of investor-herding index (IHRB) and manager-herding index (MHRB) on financial performance (FFP). The study utilizes the micro-level data of 296 listed firms of Pakistan stock Exchange (PSX) from 2013 to 2017. We find that the investors' and managers' herding significantly affects FFP. This study has a unique contribution to the literature on behavioral finance by addressing the least focused phenomena of firm-level biases and their potential impact on FFP. We also supplement that positive herding behavior is reflected by the bullish trend and inverse herding behavior of investors with respect to firm value leads toward bearish trend of a stock market index. The likelihood of a market crash may become more stringent in circumstances once managers and investors interactively exhibit negative herding behavior. Thus, the study offers useful policy and strategy implications for the associated stakeholders to devise the policies accordingly.