Information aggregation in financial markets with career concerns

Dasgupta, Amil; Prat, Andrea

doi:10.1016/j.jet.2008.01.005

Cited by 118 publications

(114 citation statements)

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“…In the present paper, we turn to the laboratory to study whether Dasgupta and Prat's [2008] theory of reputational herding can explain financial market behavior. Their theory suggests that investors engage in herd behavior if they face reputational incentives and asset prices get sufficiently precise (i.e., profits from trading get sufficiently small).…”

Section: Methodsmentioning

confidence: 99%

“…1 As the above quotation suggests, another potential source of herd behavior is reputational concerns of individual investors (e.g., fund managers) vis-a-vis outside observers (e.g., potential future employers). In particular, Dasgupta and Prat [2008] introduce career concerns (in the spirit of Scharfstein and Stein [1990]) in the Glosten and Milgrom [1985] model by assuming that investors are of various (unobservable) ability types. In analogy to Avery and Zemsky [1998], Dasgupta and Prat [2008] show that, following a number of trades in the same direction, the profit from trading an asset becomes smaller because prices get more precise.…”

Section: Motivationmentioning

confidence: 99%

“…In particular, Dasgupta and Prat [2008] introduce career concerns (in the spirit of Scharfstein and Stein [1990]) in the Glosten and Milgrom [1985] model by assuming that investors are of various (unobservable) ability types. In analogy to Avery and Zemsky [1998], Dasgupta and Prat [2008] show that, following a number of trades in the same direction, the profit from trading an asset becomes smaller because prices get more precise. At the same time, if one's private information runs counter to the behavior of earlier investors, acting on the own signal implies a reputational loss, which might make it optimal to herd.…”

Section: Motivationmentioning

confidence: 99%

“…In the spirit of Dasgupta and Prat [2008], career concerns are introduced in a sequential asset market where wages for investors are set by subjects in the role of employers. Employers can observe investment behavior, but not investors' ability types.…”

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Reputational Herding in Financial Markets: A Laboratory Experiment

Roider

Voskort

2016

Journal of Behavioral Finance

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We study reputational herding in financial markets in a laboratory experiment. In the spirit of Dasgupta and Prat [2008], career concerns are introduced in a sequential asset market where wages for investors are set by subjects in the role of employers. Employers can observe investment behavior, but not investors' ability types. Thereby, reputational incentives may arise endogenously. We find that a sizable fraction of investors follows an established trend even in a setting where there are no reputational incentives. In a setting where there are reputational concerns, they do not seem to create substantial herd behavior.

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Section: Methodsmentioning

confidence: 99%

Section: Motivationmentioning

confidence: 99%

Section: Motivationmentioning

confidence: 99%

mentioning

confidence: 99%

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Reputational Herding in Financial Markets: A Laboratory Experiment

Roider

Voskort

2016

Journal of Behavioral Finance

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“…Moreover, imitating fund managers with a high reputation has less severe consequences in the case of a failure (Scharfstein andStein, 1990, Dasgupta andPrat, 2008). Furthermore, fund managers are remunerated according to their relative performance within a certain period of time which usually equals one year.…”

Section: In His Famous Bookmentioning

confidence: 99%

Fluctuations of Social Influence: Evidence from the Behaviour of Mutual Fund Managers During the Economic Crisis 2008/09

König

2012

SSRN Journal

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In this paper, I analyse the reciprocal social in uence on investment decisions within an international group of roughly 2,000 mutual fund managers who invested in companies in the DAX30. Using a robust estimation procedure, I provide empirical evidence that the average fund manager puts 0.69% more portfolio weight on a particular stock, if his peers on average assign a weight to the corresponding position which is 1% higher compared to other stocks in the portfolio. The dynamics of this in uence on the choice of portfolio weights suggest that fund managers adjust their behaviour according to the prevailing market situation and are more strongly in uenced by others in times of an economic downturn. Analysing the working locations of the fund managers, I conclude that more than 90% of the magnitude of in uence stems from the social learning. While this form of in uence varies much over time, the magnitude of in uence resulting from the exchange of opinion is more or less constant. 1 This corresponds to one third of the global investable equity opportunity set. 2 Hence, mutual fund managers' overall investment behaviour might have a considerable impact on the dynamics of stock prices, as similar investment decisions might drive prices into a speci c direction. In this context, it is important to point out how analogous decisions arise. Mutual fund managers are institutional investors with similar investment strategies, such that it is likely that they independently make the same decisions. However, they might also in uence each other such that subsequently investment decisions are aligned.There is a large body of nancial literature that provides empirical evidence in favour of the latter explanation, i.e. social in uence among mutual fund managers (see e.g. Hirshleifer and Teoh (2008) for a recent survey). Social in uence exclusively refers to the situation where fund managers directly inuence each other. This is opposed to indirect in uence that for instance arises via market price mechanisms. The empirical literature on social inuence among mutual fund managers can be divided into two main strands depending on how fund managers learn about other fund managers' investment decisions. Observational in uence, also known as social learning, is generally stated by the strand of literature that deals with herding behaviour (see e.g. Lakonishok et al. (1992), Wermers (1999), Walter and Weber (2006) 111 exchange of opinion, also known as word-of-mouth e ect 3 (see e.g. Shiller and Pound (1989), Hong et al. (2005) and Pareek (2011)).,With this paper, I contribute to both strands of literature by empirically determining the whole magnitude of social in uence among fund managers and dividing it into observational in uence and in uence from the exchange of opinion afterwards. Irrespective of the way the in uence takes place, I allow it to be heterogeneous among fund managers. This means I do not assume that a single fund manager is equally in uenced by all other fund managers.As a major contribution, I relate both observatio...

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Corporate reputation and firms' performance: Evidence from Spain

Sánchez

Vega

2018

Corp Soc Responsibility Env

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Reputational risk is negatively perceived by stakeholders and economic agents, and can cause negative future effects on sustainability, corporate image and stakeholder engagement. This study analyzes and selects bad news regarding a sample of Spanish listed companies and uses it to explain abnormal returns and liquidity risk, to better understand how decisions should be taken in the future in a more innovative and sustainable way. The results indicate that there are negative reputational effects on excess returns and trading volume variations, and positive effects on volatility. Additionally, an increase in illiquidity is implied. The inclusion of bad reputational news in the model improves its goodness of fit by between 1.25% and 3%.

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Information aggregation in financial markets with career concerns

Cited by 118 publications

References 20 publications

Reputational Herding in Financial Markets: A Laboratory Experiment

Reputational Herding in Financial Markets: A Laboratory Experiment

Fluctuations of Social Influence: Evidence from the Behaviour of Mutual Fund Managers During the Economic Crisis 2008/09

Corporate reputation and firms' performance: Evidence from Spain

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