The effects of ifrs, financial market regulation, and national economic culture on investors’ herding practice / Mohammed Lawal Danrimi

Mohammed Lawal , Danrimi (2018) The effects of ifrs, financial market regulation, and national economic culture on investors’ herding practice / Mohammed Lawal Danrimi. PhD thesis, University of Malaya.

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Abstract

The purpose of this study is to investigate whether the EU adoption of International Financial Reporting Standards (IFRS) and reform of financial market regulatory infrastructure promote or inhibit investors’ herding practice in the equity markets. Utilizing a modified non-linear model of cross-sectional absolute deviation (CSAD), the empirical findings of this study corroborate the notion that effective financial regulations encourage fundamental-based trading and reduce irrational investment behavior. In particular, with regards to herding bias, at face value, this study finds that the phenomenon is significantly practiced in the EU equity markets following the EU financial regulatory changes. However, taking a closer look at this evidence, it is found that the observed herding phenomenon around the new regulatory regime is largely driven by fundamental information. Hence, suggesting that improvement in information environment emanating from the EU financial regulatory changes induces investors to trade in a contemporaneous manner without necessarily imitating the actions of others but due to identical reaction to common fundamental information. Similarly, the study finds that the new regulatory changes seem not to be the only instigator of the observed fundamental based herding, instead, national economic culture; particularly, the degree of individualism and masculinity is found to be another contributing factor. The findings of this study are expected to be of interest to academics, regulators, and policymakers in performing a cost-benefit analysis of the financial regulations. They are also expected to be useful to market participants who make portfolio decisions based on firms’ fundamental variables, treating them as principal indicators of future market movement.

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