Research On The Impact Of Herding Of China’s Institutional Investors On Synchronicity

Synchronicity means the prices of different stocks change in the same direction, which is commonly known as the stock prices ―with the rise with the fall‖. If this situation happens, investors can not use the Capital Asset Pricing Model and portfolio strategy when they make investment decisions. What’s more, it will increase the risk contagion throughout the financial market and be major setback of economic growth. However, current studies have shown that synchronicity in China’s stock market is very serous. Now, the size of capitalization held by institutional investors has reached more than half of the whole market and institutional investors have played an important role in C hina’s capital market. But, because of the short development and imperfect market mechanism, institutional investors haven’t form mature investment idea yet and their irrational behavior will exacerbate volatility of the stock prices and affect the stability of the market. After all, we consider that irrational behavior, especially herding, is the main reason of synchronicity in China’s stock market. Therefore, we will summary the theory and literatures first, and then study the relationship of institutional investors’ herding and the synchronicity.First, we study the reason of closed-end funds’ herding. Some studies suggest that accounting information is the most important reference when analysis the value of a public company, and it will have great influence on the institutional investors’ decisions. Therefore, accounting standard will guarantee the quality of accounting information and inhibit herding effectively. This paper pays attention on the herding of the 146 closed-end funds between 2004—2011, and tries to find out if accounting information is the reason or not. The results prove our inferences, and show that before the new Accounting Standard was carried out, more accounting information would exacerbate institutional investors’ herding, but the situation was on the contrary after the new Accounting Standard was carried out. We also find that with the improvement of the accounting system, institutional investors’ herding will mitigate if a public company publishes accounting information well, but institutional investors’ herding will exacerbate when the situation is on the contrary. Buyer herding will mitigate when the market environment turns well, and Seller herding will exacerbate when the market environment turns well.Then base on the research did before, we go on study the relationship of closed-end fund’s herding and synchronicity. The results show that in the long run China’s institutional investors will do more value investment and synchronicity will decline when institutional investors’ herding exacerbates. In addition, synchronicity will decline when Buyer herdingexacerbates, and will increase when Seller herding exacerbates. In a bear market, synchronicity will decline when Buyer herding exacerbates. In a bull market, synchronicity will increase when Seller herding exacerbates.In summary, we found that even though China’s institutional investors present both value investment and short-term speculation when manage the funds, they still follow the long-term value investment idea on the whole. Although influenced by the market atmosphere institutional investors speculate sometimes, they still act as value investors. Thus, regulators can properly guide the behavior of institutional investors in order to mitigate irrational herding. Meanwhile, relevant departments should improve the market mechanism and accounting system persistently to decline synchronicity and ensure the healthy development of the stock market.