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Herding behaviour and the declining value relevance of accounting information: evidence from an emerging stock market

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  • Muhammad Imran Chaudhry
  • Abdoul G. Sam

Abstract

This article sheds light on the underlying mechanisms behind the changes in the value relevance of accounting information in the Karachi Stock Exchange (KSE) during the 1999–2010 period. We find that neither changes in earnings quality nor the earnings lack of timeliness hypothesis can explain the decline in the value relevance of accounting information in the KSE. Based on the stylized facts associated with the growth of the KSE and the broader economics literature, we argue that the reduction in the explanatory power of accounting information vis-à-vis stock returns was caused by herding behaviour. Empirical estimates from state-space model of herding behaviour confirm the existence of herding, and we find that the value relevance of accounting information is significantly lower in periods characterized by herding behaviour. This article is also amongst the first attempts to empirically demonstrate that an expansionary monetary policy and increases in foreign portfolio investment lead to increased levels of herding.

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  • Muhammad Imran Chaudhry & Abdoul G. Sam, 2018. "Herding behaviour and the declining value relevance of accounting information: evidence from an emerging stock market," Applied Economics, Taylor & Francis Journals, vol. 50(49), pages 5335-5353, October.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:49:p:5335-5353
    DOI: 10.1080/00036846.2018.1486989
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    Cited by:

    1. Wilkin, Carla & Ferreira, Aldónio & Rotaru, Kristian & Gaerlan, Luigi Red, 2020. "Big data prioritization in SCM decision-making: Its role and performance implications," International Journal of Accounting Information Systems, Elsevier, vol. 38(C).

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