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Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance

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  • HAO JIANG
  • MICHELA VERARDO

Abstract

We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund‐level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: Antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding‐antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.

Suggested Citation

  • Hao Jiang & Michela Verardo, 2018. "Does Herding Behavior Reveal Skill? An Analysis of Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 73(5), pages 2229-2269, October.
    • Handle: RePEc:bla:jfinan:v:73:y:2018:i:5:p:2229-2269
    DOI: 10.1111/jofi.12699
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