Empirical Analysis On Herd Behavior In China’s Stock Market After Equity Division Era

Herd behavior is a common phenomenon exists in the financial markets. It’s akind of irrational investment decision-making behavior that means investors dependon public opinion and imitate other investors under the asymmetric informationsituation. The existence of herd behavior in the financial can lead to wide fluctuationsof asset prices, increase the instability and vulnerability of financial market, acceleratethe spread of global financial crisis. Herding behavior’s adverse effects seriouslyhindered the sustainable development of the financial market, so, research on herdbehavior has been academia and government authorities’ focus of concern.China’s stock market was born under the background of global economicgrowth, now it has been one of the largest emerging stock market in the world.Although China’s stock market has already experienced almost20years’development,compared with the developed financial market, China’s stock market is lower ininformation transparency, stronger in policy orientation and full of individualparticipants whose investment behavior is more speculative. All these features inChina’s stock market encourage herding to form, especially the existence of equitydivision which persecutes China’s capital market for many years, restricteddevelopment of China’s capital market and regulation of the fundamental reform ofstate-owned assets management system in many aspects. With the development ofChina’s stock markets, the system is also constantly improved. In2004, the statecouncil issued―certain opinions on promoting the reform, opening and stability to thecapital market ", definitely put forward the resolution to settle the equity divisionproblem positively and safely. The settlement of equity division which is a historicalsystem defect, is the most influenced reform act since the establishment of China’ssecurities market.By now, equity division reform has already past six years, the effect of equity division reform also appeared gradually. The transformation of the system in our stockmarket will affect the investors’behavior definitely. The solution to the equity divisionproblem will help realize the supply and demand balance and the real pricingmechanism of stock market, improve the investment environment. At the same time,the equity division reform aimed to protect of investors’ legal rights, especially thepublic investors’, it will greatly improve the degree of investors’confidence.In this context, whether herd behavior still exists in the China’s stock market or itwill present some new features. All of the propositions are worth to research anddiscuss.In this article, we use CCK model which is raised by Chang, Cheng and Khoranato make empirical research on the herd behavior in shanghai and shenzhen stockmarket. We take903companies listed in A share market as the object, all of whichcarried equity division reform in2006.We select target’s daily trading price in January2,2003to December31,2010interval as the sample data. First，we make empiricaltest on herd behavior overall the Shanghai and Shenzhen stock market. At the sametime, this paper focuses on the test on herding behavior in reform era after ofShanghai and Shenzhen stock market. This paper made empirical research on herdingcharacteristics from three aspects: the comparison research of the herding behaviorbetween reform time before and after, the difference research on herd behavior inindustry plate and in performance plate.Through the empirical research and analysis, this paper has made some valuableresults. First of all, in the January2,2003-December31,2010sample period, herdbehavior existed in both Shanghai and Shenzhen stock markets, but the severity ofherding presents no obvious difference between market rise and down cases. Second,inspection results of the herding comparison in different periods, showed that in thedifferent reform stages, herding behavior in the stock market appears significantdifferences. Both Shanghai and Shenzhen markets exists significant herd behaviorbefore the reform. As equity division reform carried out, the herding phenomenondisappeared. With reform achieved in Shanghai and Shenzhen market, herd behaviorcome up again. Second, for the difference research in industry plate, the evidenceshow that compare with plate that provide daily consumption, such as biologicalpharmaceutical plate, social services plate, food beverage plate, severity of herdbehavior is much higher in oil chemical plastic plate, mechanical equipment plate andinstrument plate. Finally, for the difference research in performance plate, theevidence show that herd behavior exists in blue chip stocks, moderate stocks and trashstock. But compare with blue chip stocks and moderate stocks, severity of herd behavior is much higher in trash stock.Combined with the empirical result and the actual situation of the stock market,this paper analyses the reasons of the existence of herding behavior in the stockmarket, and made some In-depth analysis on herding characteristic differ frombackground, industries and performance. According to the characteristics of herding inChina’s stock market, we supply series of policy suggestions from the individualinvestors, regulators, governments authorities respectively, includes changinginvestment ideas, investment strategy transformation, market structure adjustment,hedge mechanism introduction, strengthening supervision, perfecting the informationdisclosure system, changing the government role positioning, ensuring the prospectiveand stability of system regulations, to optimize the investors’ decision, abate herdingbehavior in the stock market, and promote the sustainable development of China’sstock market.