The Herding Behavior and Financial Crisis: Evidence from Chinese ADRs

Abstract

This paper investigates the herding behavior among Chinese American Depository Receipts (ADRs) during 1993–2008. We find the evidence of herding among Chinese ADRs in both rising and falling markets. Moreover, the herding has no significant difference in the host market (NYSE or NASDAQ), where the ADRs were traded, and the underlying markets (mainland China or Hong Kong), where the ADRs were issued. However, we find that herding occurs only among those Chinese ADRs issued during the time of Internet bubble, indicating that market timing has great effects on herding behavior, while the origin of issuers does not matter. Thus, this paper concludes that the herding behavior of Chinese ADRs supports the information-driven hypothesis, and this result has important implication on global financial crisis. This paper suggests that information-driven herding exists among Chinese ADRs. The results support our hypothesis that Chinese ADRs are dominated by sophisticated investors. To further stabilize ADR stock markets, it is imperative to improve information transparency of the underlying firms, especially those Chinese ADRs issued during the time of Internet bubble.

Keywords: Herding Behavior, Financial Crisis, Chinese ADRs

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