Mutual Fund Herding in Response to Hedge Fund

Herding and the Impacts on Stock Prices

Yawen Jiao and Pengfei Ye*

Abstract

We examine whether mutual funds and hedge funds herd after each other and the
associated impacts on stock prices. We find strong evidence that mutual funds herd into or out
of stocks following the herd of hedge funds: mutual funds herding measure is positively
related to last quarters hedge fund herding. In contrast, hedge funds do not follow mutual
funds. Mutual funds following of hedge funds leads to a sharp price reversal in the next
quarter, whereas hedge fund herding itself does not destabilize prices. Further, a mutual
funds following intensity increases with its past performance. The top 30 percent of mutual
funds most active in following hedge funds do so persistently and drastically increase their
herding subsequent to intense herding by hedge funds. They are also the group driving the
above price reversals. Overall, our evidence is consistent with the reputational incentives of
mutual fund herding and the associated price destabilization effects.

JEL Classification: G11, G23

Keywords: mutual funds; hedge funds; herding; equity returns

*
Jiao is at the University of California, Riverside. Ye is at the Rensselaer Polytechnic Institute. Their email
addresses are yawenj@ucr.edu and yep@rpi.edu, respectively. The authors thank the participants at the 2011
FIRS Conference and 2010 Triple Crown Conference, and seminar participants at the Rensselaer Polytechnic
Institute and John Hopkins University for helpful comments and discussions.

Electronic copy available at: http://ssrn.com/abstract=2517063

1. Introduction

With the recent success of the hedge fund industry (e.g., Kosowski, Naik, and Teo, 2007;

Aggarwal and Jorion, 2010), hedge funds investment strategies have drawn significant attention

and are believed to have a strong impact on mutual funds. For example, the industry sources

repeatedly reported on the recent trend among mutual fund families to launch funds specifically

designed to mimic hedge funds (e.g., Wall Street Journal February 21, 2006). The existing

literature related to this trend focuses on the performance of hedged mutual funds and

managers of side-by-side hedge and mutual funds (e.g., Agarwal, Boyson, and Naik, 2009;

Nohel, Wang, and Zheng, 2009), leaving a number of questions unanswered. A particularly

important category of these questions deals with the degree and motivation of mutual funds in

mimicking hedge funds stock trading strategies and the associated implications for stock prices,

which we explore in this paper. Specifically, we seek to answer the following questions: Do

mutual funds follow hedge funds into and out of stocks (known as herding, i.e., trading in the

same direction sequentially or simultaneously)? Does such following, if it exists, expedite the

adjustment of stock prices toward fundamental values? Or does it destabilize stock prices and

cause future price reversals instead? What motivates mutual funds to follow hedge funds? Is such

following deliberate or by chance?

The theoretical literature on herding offers several reasons for expecting mutual funds to

herd after hedge funds.1 First, mutual funds may infer information from prior trades of hedge

funds which dominates their own information (e.g., Banerjee, 1992; Bikhchandani, Hirshleifer,

and Welch, 1992). Second, mutual funds may choose to investigate the same information as

hedge funds (e.g., Froot, Scharfstein, and Stein, 1992; Hirshleifer, Subrahmanyam and Titman,

1994). Third, mutual fund managers may herd after hedge funds to look smart to protect their
1
Please see Section 2 for a thorough review on the empirical evidence of investor herding.

Electronic copy available at: http://ssrn.com/abstract=2517063

current status levels (e.g., Graham, 1999; Prendgergast and Stole, 1996) or because of their

concerns about reputation damage if acting differently from others (e.g., Scharfstein and Stein,

1990). It is also possible that mutual funds do not herd after hedge funds, particularly if they are

aware of the possibility for hedge funds to deliberately exploit such behavior.2

Using quarterly data on mutual funds and hedge funds equity ownership, we document

a positive relationship between mutual fund herding in the current quarter and hedge fund

herding in the last quarter, and this relationship is robust to accounting for the possibility that

hedge funds might front-run the predictable trades of mutual funds (Shive and Yun, 2013). In

other words, mutual funds follow the herd of hedge funds. In contrast, hedge funds do not herd

after mutual funds. Mutual funds following of hedge funds leads to a sharp price reversal in the

next quarter, whereas hedge fund herding itself is not associated with future price reversals.

Further, the intensity of mutual funds in following hedge funds increases with their past

performance. The top 30 percent of mutual funds most active in following hedge funds do so

persistently and drastically increase their herding subsequent to intense herding by hedge funds.

They are also the group driving the above price reversals. Overall, our evidence is consistent

with high reputation mutual fund managers herding after hedge funds and the associated price

destabilization effects (e.g., Graham, 1999; Prendgergast and Stole, 1996).

We begin our analyses by constructing the Brown, Wei, and Wermers (2014; BWW

hereafter) adjusted herding measure based on Lakonishock, Shleifer, and Vishny (1992; LSV

hereafter) and Wermers (1999) herding metrics for mutual funds and hedge funds, respectively,

to capture the degree of herding in each group. We then examine the relation between mutual

fund herding in the current quarter and hedge fund herding in the last quarter, and find a positive

2
See Chen, Hanson, Hong and Stein (2008) and Shive and Yun (2013) for evidence that hedge funds take
advantage of mutual funds predictable trading activities.

2
and significant association between them. In contrast, there is no relation between hedge fund

herding in the current quarter and mutual fund herding in the last quarter. In other words, mutual

funds herd after hedge funds, but not vice versa. These findings are obtained after controlling for

a number of factors known in the literature to affect institutional herding, implying that they are

unlikely to be driven by mutual funds preference for certain stock characteristics or investment

styles. Our results also remain after excluding mutual funds predictable trades associated with

the potential front-running effect of hedge funds in Shive and Yun (2013), suggesting that they

stem from mutual funds intentional following of hedge funds.

Next, we explore the price impacts of mutual funds following of hedge funds. We

construct a sample of stocks for which mutual funds closely herd after hedge funds: stocks

whose hedge fund herding in the last quarter and mutual fund herding in the current quarter are

both in the highest 20% of the specific quarters (i.e., close following in buy-herding), and stocks

whose hedge fund herding in the last quarter and mutual fund herding in the current quarter are

both in the lowest 20% of the specific quarters (i.e., close following in sell-herding). We find

evidence of sharp future price reversals among these stocks that are drastically different from the

return patterns of stocks without mutual funds close following of hedge funds. These findings

show that mutual funds substantially destabilize stock prices when closely following hedge

funds.

One potential concern about the above findings is that the price destabilization effects

may be driven by hedge fund herding itself instead of mutual funds following of hedge funds.

Our findings, however, render little support for this hypothesis: hedge fund herding is positively

related to next quarters stock returns but does not lead to price reversals in any other subsequent

3
quarters. This finding is consistent with hedge fund herding containing future-return-related

information and speeding the stock price adjustment process.

Another confounding factor for our results on price reversals is the time-series

dependence in mutual fund herding and the positive relation between contemporaneous mutual

fund and hedge fund herding, which may lead to a positive correlation between our measure of

mutual funds following of hedge funds and their own herding in consecutive quarters. In other

words, the price reversals documented above may stem from continuous herding of mutual funds

instead of their following of hedge funds. To test this possibility, we exclude stocks with intense

mutual fund herding in consecutive quarters from the sample of stocks for which mutual funds

closely herd after hedge funds. In other words, a stock is classified into the close following group

if and only if its mutual fund herding in the current quarter is closely related to its hedge fund

herding but not its mutual fund herding in the last quarter. Our results on price reversals remain

qualitatively unchanged after this restriction, which reinforce the price destabilization effects of

mutual funds following of hedge funds.

In a similar manner, we also test whether our results on future price reversals are driven

by mutual funds and hedge funds herding on common information signals. Specifically, we

classify a stock into the close following group if and only if its mutual fund herding in the

current quarter is closely related to its hedge fund herding in the last quarter but not its hedge

fund herding in the current quarter, thereby excluding the stocks with intense contemporaneous

mutual and hedge fund herding from the sample of stocks for which mutual funds closely herd

after hedge funds. We find that our previous results on price reversals again remain qualitatively

unchanged, while contemporaneous herding by mutual and hedge funds does not have any price

destabilization effects.

4
 Because mutual funds following of hedge funds is price destabilizing, it is likely to be

(at least partially) driven by incentives unrelated to stock fundamentals, such as mutual fund

managers reputation or career concerns. For example, Graham (1999) and Prendgergast and

Stole (1996) argue that high reputation agents may herd more than their low reputation

counterparts to look smart and protect their current status level, whereas Chevalier and Ellison

(1999) and BWW (2014) suggest the opposite by documenting that low reputation managers are

more reluctant to deviate from the crowd because of concerns about job security.3 In the spirit of

Grinblatt, Titman, and Wermers (1995) momentum investing measure, we construct a following

intensity measure to quantify how actively a mutual fund adjusts its portfolio in response to last

quarters hedge fund herding, and find a positive association between this measure and the

managers reputation (measured by the alpha in the past sixty months).

If a mutual fund deliberately follows hedge funds, it would exhibit persistence over time

in adjusting its portfolio based on past herding patterns of hedge funds. Thus, to investigate

whether the positive association between mutual fund herding and last quarters hedge fund

herding documented above represents mutual funds intentional pursuits of hedge funds

strategies or chance, we study the persistence in mutual funds following of hedge funds.4 Using

the above following intensity measure, we sort funds based on their past following intensity and

3
Other reputational herding models such as Scharfstein and Stein (1990) also discuss the relationship between a
managers reputation and her herding tendency. In particular, in Scharfstein and Stein (1990), a high reputation
manager may herd more for fear of losing the current position when outside labor market opportunities are poor,
implying a positive association between reputation and herding.
4
For example, a positive association between mutual fund herding and past hedge fund herding can arise if some
mutual funds have the same information signals as hedge funds but are slower in producing or receiving these
signals. Three possible outcomes can exist in this scenario: First, if this happens by chance for different mutual
funds in different periods, then individual funds portfolio adjustments are unlikely to exhibit persistent correlations
over time with past hedge fund herding. Second, if this happens among the same mutual funds period after period,
they are better off simply following hedge funds and save the information production costs, which is particularly
true for our sample because quarterly equity positions of our sample hedge funds are public. Finally, if a group of
investors (e.g., hedge funds and skilled mutual funds) have access to information that only becomes available to
other investors later, herding of less skilled mutual funds are expected to be more related to previous hedge fund
herding than that of more skilled mutual funds. However, as we have discussed above, our evidence is in contrast
with this prediction in that more skilled mutual funds herd after hedge funds more.

5
find those ranked in the top thirty percent to exhibit strong persistence in actively following

hedge funds in the next four quarters. This finding is consistent with a significant fraction of

mutual funds following of hedge funds being deliberate.

Based on the evidence of the top thirty percent of mutual funds persistence in following

hedge funds, we divide mutual funds into deliberate followers and non-deliberate followers, and

find that the former groups herding has a strong positive relationship with past hedge fund

herding. Deliberate followers also significantly increase their herding subsequent to intense

herding by hedge funds. Both findings suggest that they are the driving force for mutual funds

following of hedge funds. We also find that the prices reversals in quarter +1 discussed above are

the result of deliberate followers herding after hedge funds. Thus, the aforementioned price

destabilization effect is indeed driven by the stock price over-reaction occurred when mutual

funds deliberately follow hedge funds.

To our best knowledge, this study is the first in the literature to examine whether and to

what extent mutual funds herd after hedge funds, as well as the incentives behind such following

behavior. We are also the first to uncover the price impacts of mutual funds response to hedge

fund herding, thereby adding to the stock-price predictability literature (Gompers and Metrick,

2001; Sias, Starks, and Titman, 2006; Coval and Stafford, 2007; Yan and Zhang, 2009).

The remainder of this paper is organized as follows. In Section 2, we review the

empirical studies of herding. In Section 3, we describe the data and present summary statistics of

the main variables used in this study. In Section 4, we examine mutual fund herding in response

to hedge fund herding and its price impacts. We conclude in Section 5.

2. Empirical Evidence on Institutional Investors Herding Behaviors

6
 It has long been argued in the literature that many investors tend to flock together in

trading and such correlated trading might have tangible price impacts. Lakonishock, Shleifer,

and Vishny (1992) is among the earliest to empirically investigate the existence and degree of

such herding behavior. Focusing on 769 all-equity tax-exempt funds in the United States, of

which most were pension funds, they find that overall, the magnitude of pension funds herding

is small. However, they also notice that although pension funds herd little in large cap stocks,

they do so more in small cap stocks. Grinblatt, Titman, and Wermers (1995) extend the

investigation to mutual funds. They find that US mutual funds have a similar level of herding

intensity as pension funds in LSV. They further find that there is virtually no relationship

between an average mutual funds tendency to herd and its performance. Wermers (1999)

investigates mutual fund herdings impact on stock prices. He finds that instead of destabilizing

stock prices, mutual fund herding speeds the price-adjustment process. Finally, Sias (2004)

extends this strand of research beyond mutual funds to all institutional investors in the US. His

study shows that institutional investors follow each other into and out of the same securities as a

result of inferring information from each other's trades.

Herding is not an American phenomenon. It is also widely documented in Asian and

European capital markets. For example, Choe, Kho and Stulz (1999) find that foreign investors

herded intensively in the Korean stock market before the 1997 Asian Crisis. Chang, Cheng and

Khorana (1999) find no evidence of herding among investors in Hong Kong but partial evidence

of herding in Japan. They find strong evidence of herding, on the other hand, for South Korea

and Taiwan. Lobao and Serra (2002) report strong herding by Portuguese mutual funds.

Kyrolainen and Perttunen (2003) find that both active and passive investors of Finish stock

market exhibit strong herding tendency in the bubble period of 1997-2000. Voronkova and Bohl

7
(2005) find that Polish pension fund managers are actively involved in herding. Wylie (2005)

examines 268 UK Equity mutual funds and documented the existence of a modest amount of

herding in the largest and smallest UK stocks but little herding in other stocks. Walter and Weber

(2006) investigate the trading activities of German mutual funds. They find that a significant

portion of mutual fund herding in the German stock market results from changes in benchmark

index composition. They also find that herding neither destabilizes nor stabilizes stock prices. In

addition, Oehler and Chao (2003) find strong evidence of herding in the German bond market,

even though it is weaker than in stock markets. Finally, Mohamed, Bellando, Ringuede and

Vaugourg (2011) find that French mutual funds herd more in small capitalization stocks and

among foreign stocks (relative to UE-15 or French stocks). Finally, they find that sell-herding

has a destabilizing impact on stock prices.

3. Data and Sample

3.1. The Hedge Fund Sample

Beginning from 1978, institutional investors that have more than a hundred million U.S.

dollars under management are required to file 13F forms to the Securities and Exchange

Commission (SEC) each quarter for U.S. equity holdings of more than two hundred thousand

dollars or more than ten thousand shares. Hedge funds with equity holdings satisfying the above

criteria are therefore required to make 13F filings. 5 We highlight that because the criteria

described above are large, hedge funds making 13F filings are likely to be the ones that actively
5
Some hedge funds may request secrecy from the SEC by claiming that timely public filings might cause damages
to them. Such filings are typically released one year later. According to Griffin and Xu (2009), confidential filings
were used by a very small fraction of hedge funds. Although the confidential filings are interesting phenomenon
analyzed in several recent studies including Agarwal, Fos, and Jiang (2012) and Agarwal, Jiang, Tang and Yang
(2013), we believe it is less related to our paper. We examine whether and how mutual funds respond to hedge
funds trading activities, which is conditional on mutual funds being able to observe the filings of hedge funds.
Hedge funds secret filings are not observable and hence cannot be followed by mutual funds. Therefore, they
should be excluded from our analyses.

8
participate in the equity market and attach significant importance to their equity strategies. A

clear limitation of 13F filings is the lack of information on hedge funds shorting activities,

leading us to base all analyses on the long side of their portfolios. However, because mutual

funds are not intensively involved in shorting, we do not expect this limitation to significantly

confound our results. Further, even if mutual funds respond to hedge fund shorting, the lack of

shorting data is likely to lead to understatement of our findings.6

The hedge funds included in our sample are identified from Thomson Financials

CDA/Spectrum 13F database. CDA/Spectrum contains five types of institutional investors.

Types 1 and 2 are bank trusts and insurance companies and are therefore excluded from our

sample. The other three types are investment managers, investment advisers and others.7 Similar

to Brunnermeier and Nagel (2004) and Griffin and Xu (2009), we locate the ADV forms of these

three types of institutions and exclude an institution from our hedge fund sample if it fails any of

the following requirements: (1) more than 50% of assets are in other pooled investment

vehicles, (2) more than 50% of clients are high-net-worth individuals, and (3) the institution

charges performance-based fees. 8 For the remaining institutions, we browse their websites

and/or conduct FACTIVA news searches to exclude the ones involving in non-hedge-fund

businesses. The final hedge funds we identified are all from Types 4 and 5.

The number of hedge funds in the 13F database becomes reasonable to form a herd only

after mid-1990s (in both our sample and Griffin and Xu (2009)), and we therefore exclude the

period prior to that from our sample. Furthermore, Brunnermeier and Nagel (2004) show hedge

funds destabilize stock prices in the 1998-1999 tech-bubble. This effect is very different from the
6
Throughout this study we only consider mutual and hedge funds with a positive holding of a stock.
7
CDA/Spectrum contains some type classification errors for types 3-5 institutions after 1998, mostly involving
classifying types 3-4 as type 5 (Lewellen, 2009). These errors do not affect our analyses.
8
The SEC required hedge funds with more than 14 clients, more than $25 million of assets, and lockup period
shorter than two years to file ADV forms by February 1, 2006. These funds are therefore included in our sample.
See Brown Goetzmann, Liang and Schwarz (2008) for details.

9
price impacts of the interactions between hedge funds and mutual funds, which is the focus of

the current paper. 9 To avoid the confounding effect of the tech-bubble, we focus on the

post-2000 period throughout the paper. In addition, because we relate mutual funds following of

hedge funds to next four quarters stock returns, and to minimize potential biases associated with

the recent financial crisis that started in the third quarter of 2008, we stop the sample at the

second quarter of 2007.10 In sum, our sample period is 2000:Q1 - 2007:Q2.11

Our procedure of identifying hedge funds is conservative and leads to large and

prominent hedge funds without any non-hedge fund business, which is the fund sample we

intend to focus on in this study. This is because we aim at examining mutual funds following of

hedge funds, which is more likely to occur for more prominent and larger hedge funds with

ample investor attention. From the sample selection procedure described above, we identify 401

hedge fund holding companies with 13F filings during 2000:Q1 2007:Q2. Most fund holding

companies have multiple funds. Thus, the 401 firms in our sample are likely to represent over

one thousand funds.

3.2. The Mutual Fund Sample

The mutual fund data used in this study is from the Thomson-Reuters Mutual Fund

Holdings database and the CRSP Survivor-Bias-Free US Mutual Fund database. The

9
In un-tabulated analyses, we find weaker hedge fund herding than that reported in the paper and no evidence for
mutual funds following of hedge funds for the period of 1995-1999.
10
One prominent feature of this crisis is the liquidity dry-up. Aragon and Strahan (2012) show that in the midst of
the crisis, hedge funds clients withdraw funds out of the fear for fund failures. Ben-David et al. (2012) provide
evidence that hedge funds engage in intense equity sell-offs because of the redemption demands. Mutual funds also
face similar redemption pressures. Funds have to engage in fire-sales of their assets to meet such demands, which
can induce liquidity-driven return reversals such as those documented by Cella et al. (2013, forthcoming). Therefore,
if we include the crisis period in our tests, it will make our results hard to interpret because of the difficulty in
disentangling the price destabilization effects of mutual funds following of hedge funds from the fire-sale-related
return reversals.
11
Jiao (2013) uses hedge funds 13F equity holding to study the price pressures related to the magnitude of hedge
fund trading during the expansion and contraction periods of the hedge fund industry. Jiao (2013) does not explore
hedge fund herding, nor does she examine the interactions between hedge and mutual funds and the associated
impacts on stock prices.

10
Thomson-Reuters database provides quarterly mutual fund holding data, while information on

fund characteristics and performance is obtained from the CRSP Mutual Fund database.12 CRSP

reports information for each fund class and we combine the classes for a fund by each classs

TNA. We focus on actively managed domestic equity funds and exclude sector-focused funds and

index funds. Specifically, we require a mutual fund to fall into one of following styles to be

included in our sample: (1) Aggressive Growth, (2) Growth, and (3) Growth and Income. During

our sample period, the number of mutual funds used in this study is 1,635 in 2000 and 1,417 in

2007.13 Because the 401 hedge fund holding companies in our sample are likely to represent

over one thousand funds, and a hedge fund holding company with several funds is likely to have

similar equity strategies across funds (Griffin and Xu, 2009), there is no serious imbalance in

fund numbers between the hedge funds and mutual funds in our sample.14

3.3. Measuring Herding

Our key herding measure is based on the metric constructed by LSV (1992). This metric

is widely used by previous studies including Grinblatt, Titman and Wermers (1995) and Wermers

(1999). The LSV herding measure for a specific investor group (HMit) is:

HMit = | pit E[Pit]| - E|pit E[Pit]| (1)

where pit is the fraction of funds buying stock i in quarter t among all funds trading that stock in

that quarter. E[Pit] is the expected fraction of funds buying stock i in that quarter, proxied by the

12
The mandatory disclosure frequency for mutual funds was quarterly before 1984, semiannual afterwards, and
(again) quarterly after May 2004. Thus, during our sample period, mutual funds are not always required to file
equity holding information on a quarterly basis. However, the majority of funds still report their holdings every
quarter. For funds with incomplete quarterly holdings, we use the most recent prior quarters holding data for the
missing quarters, while our results are robust to omitting such observations.
13
Note that we only consider aggressive growth, growth, and growth and income funds, and the indexing trend of
the mutual fund industry during our sample period leads to the smaller number of funds in 2007 relative to 2000.
14
We recognize that the herding measure is calculated at the firm level for hedge funds and at the fund level for
mutual funds. In an untabulated test, we aggregate the mutual fund holding from fund level to family level and
repeat our baseline analysis. The results are very similar to those reported in the paper. We use fund level
information because it provides more precise herding measure than otherwise.

11
average proportion of funds buying across all stocks traded by them in that quarter. E|pit E[Pit]|

is an adjustment factor for random variations around E[Pit] assuming funds trade

independently.15 Therefore, HMit captures the similarity in funds trading direction beyond what

can be expected to occur randomly.

To distinguish herding on the buy- and sell-sides, Wermers (1999) further introduces the

buy-herd (BHMit) and sell-herd (SHMit) measures defined as:

BHMit= HMit | pit>E[pit] (2)

SHMit =HMit | pit<E[pit] (3)

Following BWW (2014), we construct an adjusted herding measure, denoted by

ADJHERD, which combines the above two directional herding measures. Specifically, for each

quarter, if a stock experiences buy-herding (sell-herding), we subtract the minimum value of

BHM (SHM) across all buy-herding (sell-herding) stocks from its BHM (SHM). For buy-herding

stocks, ADJHERD equals to the differenced value, while for sell-herding stocks it equals to the

differenced value multiplied by -1. Thus, a high (low) ADJHERD measure indicates that the

stock is heavily bought (sold) by herds of money managers.

(Insert Table 1 Here)

We calculate the herding measures for mutual funds and hedge funds separately and

distinguish them by subscripts MF and HF, respectively. One may argue that that two or three

hedge funds trading a stock in the same direction can hardly qualify as a sensible herd. Although

including such stocks does not affect our results qualitatively, we focus on stocks traded by at

least five hedge funds (similar to Wermers, 1999). In our sample, more than 32,500 stock-quarter

observations satisfy this requirement. The time-series means of cross-sectional summary

15
This adjustment factor is calculated by assuming a binomial process for the number of buyers during each
quarter. See LSV(1992) and Wermers (1999) for more details.

12
statistics of the herding measures are reported in Table 1. The mean LSV (1992) herding measure

(HM) is 1.30 percent for hedge funds, lower than the 3.32 percent for mutual funds: i.e., on

average, mutual funds are more inclined to herd than hedge funds. This pattern remains when

using the two directional herding measures (BHM and SHM). However, at the 25th and 75th

percentiles, hedge fund herding is of similar magnitude or greater than mutual fund herding. For

example, the 75th percentile of hedge fund herding is 7.41 percent and it is 7.92 percent for

mutual fund herding, while the 25th percentiles are -6.47 and -2.87 percent for the two groups,

respectively. In other words, compared to mutual funds, hedge funds herding tends to

concentrate in a smaller number of stocks. Thus, when we construct the sample of stocks for

which mutual funds closely follow hedge funds, we focus on stocks with intense hedge fund

herding (see Section 4 for details).

Table 1 also presents mutual funds and hedge funds trading information. The average

stock traded by at least five hedge funds has 14 hedge funds and 47 mutual funds trading in a

given quarter. Hedge funds net trading volume accounts for an average of 0.10 percent of shares

outstanding, while that of mutual funds accounts for 0.28 percent.16

3.4. Further Discussions on the LSV Herding Measure

Wylie (2005) points out that the LSV herding measure is not without problems. Two crucial

assumptions of the LSV methodology might not be valid in real data. First, LSV assumes that all

investors can short stocks. Yet, in reality, various legal restrictions prohibit mutual funds from

short selling. In other words, the binomial distribution for trading (buying vs selling) is in fact

16
Note that Table 1 reports the average trading volume for both stocks that were buy-herded and those that were
sell-herded. Since these two groups experience opposite trading, the cross-sectional average tends to be small and
close to zero. If we separate buy-herded stocks from sell-herded ones, the trading volume for each group is
substantially higher. For example, for buy-herded stocks, their average trading volume by mutual funds (hedge funds)
per quarter is 1.80% (1.15%) of their outstanding shares. For sell-herd stocks, their average trading volume by
mutual funds (hedge funds) per quarter is -1.66% (-1.07%) of their outstanding shares.

13
left truncated. Second, the LSV methodology assumes that the propensity of fund managers to

buy a stock is invariant for all stocks. In practice, however, the propensity to buy may be

conditional on both the size of the fund managers initial holding and net fund flows. Wylie

shows that the violation of either assumption above can result in spurious non-zero herding

measures. He further examines the effect of these problems on the empirical accuracy of the LSV

measure but found, however, that except for stocks that are traded by a very small number of
17
managers, the LSV measure is unbiased in general.

In response to the potential drawbacks of the LSV herding measure, Frey, Herbst and Walter

(2012) develop a simple model of trading and propose an alternative herding measure that

provides a consistent estimate of herding. Instead of using the first absolute moment as in the

LSV measure, the FHW model relies on the second (central) moment to construct the herding

measure. Frey et al. further use the Monte Carlo simulations to illustrate that their new measure

has better desired statistical properties than the LSV measure.

We recognize that FHW measure is superior to the LSV measure if the goal of the test is to

examine whether herding by a specific group of investors exists. We choose to adopt ADJHERD

as our key herding measure, however, for following reasons. First, although appealing, FHW

measure is designed to be non-directional and does not distinguish buy-herd from sell-herd. This

greatly limits its effective use for our research purpose: that is, investigating how one group of

investors herding correlates with that of another group of investors over time, in which the

direction of herding is important. The ADJHERD measure, on the other hand, although initially

based on the LSV methodology, is substantially modified by Wermers (1999) and BWW (2014),

and is able to identify the specific direction of herding. Furthermore, although the ADJHERD

17
Bikhchandani and Sharma (2000) discuss other drawbacks of the LSV measure. For example, they argue that the
LSV measure only captures the trading directions (buy vs sell) but does not consider the amount of stocks investors
buy or sell. Furthermore, LSV measure cannot be used to identify inter-temporal trading patterns.

14
measure cannot completely remove the potential flaws of the LSV methodology, it can at least

partially mitigate the non-zero bias of the LSV measure because the construction of the

ADJHERD adjusts both the buy herding measure and sell herding measure by their

corresponding minimum values.

To further examine whether our measure suffers from the LSV drawbacks, we conduct an

additional robustness check that focuses on stocks traded by a large number of funds. According

to Wylie (2005) and Frey et al (2012), the potential bias in the LSV herding measure becomes

less severe for stocks with high numbers of trades. Thus, we repeat our baseline analysis by

including only stocks traded by at least 20 hedge funds. We find results remain unchanged.18

Finally, we recognize that any residual bias in the original LSV measure, if it still matters, tends

to result in an under-statement instead of overstatement of our results.

3.5. Control Variables

(Insert Table 2 Here)

Prior literature identifies several stock characteristics related to the herding behavior of

institutional investors: e.g., Wermers (1999) shows that mutual fund herding is most pronounced

among small stocks and stocks with extreme previous returns, while Sias (2004) finds a positive

association between institutional herding and the information uncertainty about a stock. Thus, we

follow previous studies (e.g., BWW, 2014) and control for the following stock characteristics in

our analyses: (1) market capitalization of the previous quarter (Size); (2) book-to-market ratio

(BM); (3) return volatility (Std); (4) previous 3-month returns (Ret-3,0); (5) 9-month returns

preceding the filing quarter (Ret-12,-3); and (6) stock turnover (Turnover). BM is calculated as the

ratio of book value to market value of equity as of the prior December, where the book value of

equity is (total assets total liabilities preferred stock) + deferred taxes + convertible debt, and
18
For brevity, these results are not reported but are available upon request.

15
the market value of equity is the market capitalization. Std is the standard deviation of monthly

returns during the previous 12 months. Turnover is the mean monthly stock turnover ratio during

the previous 12 months. Stock and financial information is from CRSP and COMPUSTAT.

Summary statistics for these control variables are reported in Table 2, while we do not discuss

them for brevity.

4. Mutual Fund Herding in Response to Hedge Fund Herding and Its Price Impacts

4.1. Herding of Mutual Funds and Hedge Funds

4.1.1 Do Mutual Funds Herd After Hedge Funds?

To test whether mutual funds herd after hedge funds, we relate mutual fund herding in the

current quarter to hedge fund herding in previous quarters, controlling for the six stock

characteristics described in the last section. Specifically, we estimate the following regression in

each quarter:

ADJHERDMF, it = + 1ADJHERDHF, it-1 + 2ADJHERDHF, it-2 + Xit + it (4)

As mentioned in Section 3.3, a large and positive (negative) ADJHERDMF indicates the

heavy buy- (sell-) herding by mutual funds in the current quarter. Xit includes the six control

variables described in Section 3.5. In addition, we also include hedge fund herding in the current

quarter (ADJHERDHF,t) to account for contemporaneous herding between mutual funds and

hedge funds, and mutual fund herding during quarters -1 and -2 (ADJHERDMF,t-1 and

ADJHERDMF,t-2) to control for possible persistence in mutual fund herding documented by BWW

(2014). Including more lags of ADJHERDMF in un-tabulated analyses leads to similar results.

(Insert Table 3 Here)

Table 3 presents quarterly Fama-MacBeth regression results for equation (4) and

16
t-statistics based on Newey-West standard errors with two lags (in parentheses).19 These results

suggest that mutual funds herd after hedge funds. Specifically, the coefficients on last quarters

hedge fund herding, ADJHERDHF,-1, are positive and statistically significant at the 1 percent level

in both models (3) and (4), indicating that mutual funds herd in the same direction as last

quarters hedge fund herding. The impact of last quarters hedge fund herding is economically

significant as well: in model (4), a one-standard deviation increase in last quarters hedge fund

herding (ADJHERDHF, -1) is associated with an increase of 0.0195 17.34 = 0.34 percent in

mutual fund herding (ADJHERDMF).20

The coefficients on mutual fund herding in the previous two quarters (ADJHERDMF, -1

and ADJHERDMF, -2) in model (4) indicate that mutual fund herding is persistent for one quarter.

In fact, in this model, the strongest predictor for mutual fund herding is its own value in the last

quarter. Consistent with such persistence, we find a positive and significant association between

mutual fund herding and hedge fund herding two quarters before (ADJHERDHF, -2). Further

implications of this persistence are discussed in Section 4.4. In addition, consistent with prior

research (see, e.g., BWW, 2014), we find significant relations between mutual fund herding and

stock characteristics such as prior returns, book-to-market ratio, stock turnover, and market

capitalization. Mutual funds tend to buy value stocks and stocks with high momentum, while

they tend to sell large stocks and stocks with high turnover.

Sias, Starks, and Titman (2006) point out that the number of funds trading in the same

direction predicts stock returns better if the market mainly responds to the information in the

trades. Although the herding measures quantify the degree to which funds trade in the same

19
Results throughout the paper are robust to adding more lags in Newy-West corrections.
20
We find the average cross-sectional standard deviation of ADJHERDHF,-1 to be 17.34 percent (Table 1). The
herding measure captures the similarity in funds trading direction beyond what can be expected to occur randomly.
Because of the way it is constructed, the herding measure cannot be interpreted as the fraction of the funds trading in
the same direction.

17
direction, potential correlations between trading direction and magnitude may cast doubts on

whether our results are driven by herding or trading volume. In unreported analyses, we find

no significant correlations between mutual fund herding and hedge funds net trades in the

current and previous two quarters, nor do we observe any significant correlations between

mutual funds net trades and hedge fund herding in the current and previous two quarters,

indicating little likelihood for them to confound our results. Further, adding the net trades of

hedge funds in the current and previous two quarters to control variables in equation (4) does not

qualitatively change results in Table 3.

4.1.2 Do Hedge Funds Herd After Mutual Funds?

If mutual funds indeed herd after hedge funds, one would expect them to follow the lead

of hedge funds, but not vice versa. Thus, in this section, we investigate whether hedge funds

follow the herd of mutual funds by replacing ADJHERDMF with ADJHERDHF, and vice versa, in

equation (4), and re-estimate it for each quarter of our sample. Fama-MacBeth regression results

and t-statistics based on Newey-West procedures with two lags are reported in Table 4.

(Insert Table 4 Here)

Results in this table suggest that hedge funds do not herd after mutual funds. In particular,

in model (3), the coefficient on last quarters mutual fund herding, ADJHERDMF,-1 , is 0.0067 and

not statistically significant, indicating no association between hedge fund herding and last

quarters mutual fund herding. The coefficient on quarter -2s mutual fund herding,

ADJHERDMF,-2, is of similar magnitude at 0.0085 and not statistically significant either,

indicating no relation between hedge fund herding and mutual fund herding two quarters ago.

Adding hedge fund herding in the previous two quarters (ADJHERDHF,-1 and ADJHERDHF,-2) to

control variables in model (4) leads to qualitatively similar results. Including more lags of

18
ADJHERDHF in un-tabulated analyses leads to very similar results. Interestingly, the coefficients

on hedge fund herding in the previous two quarters (ADJHERDHF,-1 and ADJHERDHF,-2) indicate

no persistence in hedge fund herding. Though not the focus of this paper, this finding is

potentially consistent with the implication of Hirshleifer and et al. (1994) that investors with

timing advantages in collecting information may exhibit short-term position reversals.

In addition, except for the stock turnover rate (Turnover) and the return momentum

measures, stock characteristics included in equation (4) as control variables, particularly

book-to-market ratio and firm size, are not related to hedge fund herding, which is in sharp

contrast with their strong associations with mutual fund herding in Table 3. These results suggest

that the shared preference or aversion to stock characteristics documented for other types of

institutional investors in the existing literature (e.g., Falkenstein, 1996; Del Guercio, 1996;

Gompers and Metrick, 2001; Bennett, Sias, and Starks, 2003) are less widespread among hedge

funds.

Finally, in both Tables 3 and 4, we find a strong and positive relation between mutual

fund and hedge fund herding in the same quarter, suggesting the existence of contemporaneous

herding among them. Because this result is obtained after controlling for various stock

characteristics, it is unlikely to be driven by shared preference or aversion among these two

groups of investors to certain stock characteristics as documented by several prior studies (e.g.,

Falkenstein, 1996; Del Guercio, 1996; Gompers and Metrick, 2001; Bennett, Sias, and Starks,

2003). Instead, it is more consistent with the herding theories discussed in Section 1.21 We will

explore the implications of this contemporaneous herding more in Section 4.2.3 below.
21
Adding additional control variables in BWW (2014), such as standardized unexpected earnings (SUE) and an
indicator for add/drop of the S&P 500 index, weakens the correlation between contemporaneous mutual fund and
hedge fund herding substantially, suggesting this correlation is driven by the two types of funds herding on the same
information. In contrast, these additional control variables have no impacts on the relationship between mutual fund
herding and past hedge fund herding. In other words, mutual funds following of hedge funds are unlikely to be
driven by mutual funds being slower than hedge funds in reacting to the same information.

19
4.1.3 Mutual Funds Following of Hedge Funds vs. the Sitting Duck Effect

The results in Sections 4.1.1-4.1.2 suggest that mutual funds follow hedge funds in

herding. An alternative interpretation of our findings is that they may be driven by hedge funds

front-running mutual funds in anticipation of mutual fund flows into stocks (the sitting duck

effect), as shown by Shive and Yun (2013). We seek to disentangle these two interpretations in

this section.

We follow the methodology in Shive and Yun (2013) and divide a mutual funds trade in

a specific stock into a predictable, flow-driven part, and an unpredictable part. If our results are

driven by mutual funds following of hedge funds rather than the sitting duck effect, we expect

them to be robust to excluding the predictable trades of mutual funds subject to front-running by

hedge funds.

Specifically, we use the following model, as suggested by Shive and Yun (2013), to

estimate the expected flow of fund n in quarter t+1:

3 3
Flown,t 1 An, Flow n,t Bn, Rn,t (5)
0 0

where Flown,t NAVn,t NAVn,t 1 (1 Rn,t ) . Rn,t is fund ns return in quarter t and NAVn,t is

its net asset value. The coefficients A0-A3 and B0-B3 are estimated using OLS regressions and

then used to create fitted, predicted values of fund flows for each quarter. We then, again

following Shive and Yun (2013), estimate the flow-driven, predictable trading of stock i by

mutual fund n in quarter t+1 as follows:

Traden,i ,t 1 Flown,t 1 wn,i ,t (6)

wn,i,t is the portfolio weight of stock i in fund ns portfolio at the end of quarter t. Note that this

equation draws on the scaling effect documented in Coval and Stafford (2007) by assuming a

20
funds buy or sell of each stock in response to flows is proportional to the stocks weight in their

portfolios. As discussed in Shive and Yun (2013), Traden,i ,t presumably can be predicted and

front-run by hedge funds. We compute a funds unpredictable trading of stock i in quarter t by

subtracting its predictable trading from the total trading. Specifically,

Unpredictable _ Traden,i ,t Traden,i ,t Traden,i ,t (7)

By definition, this unpredictable trading measure captures mutual funds trades that cannot be

predicted from flows and thus cannot be front-run by hedge funds.

(Insert Table 5 Here)

Next, we focus on Unpredictable_Traden,i,t and construct a mutual fund herding

measure, denoted by ADJHERDMF,Nonflow,t, solely based on this non-flow driven, unpredictable

trading variable. By construction, this measure captures mutual funds herding behavior

unrelated to their trading predicted by flows. If our results are driven by the sitting duck effect

in Shive and Yun (2013), the ADJHERDMF,Nonflow,t measure is expected to have little association

with past hedge fund herding. We regress the ADJHERDMF,Nonflow,t measure on the hedge fund

herding of the past two quarters, ADJHERDHF,t-1 and ADJHERDHF,t-2, and control variables used

in our baseline regressions. The results are reported in column 1 of Panel A in Table 5. After

removing the confounding effects related to mutual funds trading driven by predictable flows,

we still observe a strong and positive relationship between mutual fund herding in the current

quarter and the hedge fund herding of the previous two quarters, as can be seen from the positive

and significant coefficients on ADJHERDHF,t-1 and ADJHERDHF,t-2. In column 2, we also control

for mutual funds herding associated with their predictable flows in the last two quarters, denoted

by ADJHERDMF,Flow,t-1 and ADJHERDMF,Flow,t-2, and find qualitatively similar results.

In Panel B of Table 5, we examine whether hedge funds herd after mutual funds past

21
unpredictable trades, which allows us to explore the possibility that results in Panel A are driven

by this reverse following behavior. Specifically, we use the hedge fund herding in the current

quarter as the dependent variable and regress it on the ADJHERDMF,Nonflow measure in the last two

quarters and control variables. Evidence in this panel renders no support for the reverse

following among hedge funds, as illustrated by the insignificant coefficients on

ADJHERDMF,Nonflow,t-1 and ADJHERDMF,Nonflow,t-2. In sum, our findings in Sections 4.1.1-4.1.2

reflect mutual funds following of instead of being front-run by hedge funds.

4.2. The Price Impact of Mutual Funds Following of Hedge Funds

4.2.1 Basic Findings

Prior research has shown that institutional investors trading often has price impacts (e.g.,

Sias, Starks, and Titman, 2006; Coval and Stafford, 2007). Thus, in this section, we explore

whether mutual funds following of hedge funds documented in Section 4.1 has destabilization

effects for stock prices and leads to future price reversals. In other words, we examine whether

the above following induces transit price gain or loss which reverse in the future.

We start our analyses with constructing a sample of stocks for which mutual funds

closely herd after hedge funds. As shown in Table 1, hedge funds tend to concentrate their

herding in stocks at the tails. Therefore, we focus on such stocks. Specifically, in each quarter,

we sort stocks by hedge fund herding in the last quarter (ADJHERDHF,t-1) and mutual fund

herding in the current quarter (ADJHERDMF,t), respectively, and divide them into quintile

portfolios. We classify stocks in the top quintiles of both or in the bottom quintiles of both as

stocks for which mutual funds closely herd after hedge funds: the intersection of the two top

(bottom) quintiles contains stocks for which mutual funds closely follow the buy-herding

(sell-herding) of hedge funds. The remaining stocks are then classified into the group without

22
mutual funds close following of hedge funds.

Drawing from BWW (2014) and Gompers and Metrick (2001), we examine the relation

between mutual funds following of hedge funds and stock returns by estimating the following

regression in each quarter:

RETi,t+k = + 1DFADJHERDMF,it + 2DNFADJHERDMF,it + Xit + it (8)

where RETi,t+k is the Daniel et al. (DGTW hereafter, 1997) characteristic-adjusted stock return

for stock i in the current or next four quarters (k = 0, 1, 4). The DGTW characteristic-adjusted

returns are calculated as follows. In each quarter, we sort stocks into quintile portfolios by size,

book-to-market ratio, and return momentum. This leaves us with 555=125 portfolios, and the

DGTW characteristic-adjusted return is computed by subtracting the value-weighted average

return of the portfolio to which a stock belongs to from its raw return. DF (DNF) is a dummy

equal to 1 for stocks in the group with (without) mutual funds close following of hedge funds

and 0 otherwise. DNF = 1 - DF. Xit includes stock turnover (Turnover), return volatility (Std),

mutual fund herding in the last quarter (ADJHERDMF,-1), hedge fund herding in the current and

last quarters (ADJHERDHF and ADJHERDHF,-1), and the change in industry-mean-adjusted return

on assets (ROA) between quarter t+k and t+k-1 (to account for variations in returns stemming

from profitability changes), where industries are defined by 2-digit SIC codes.22 If mutual funds

following of hedge funds indeed causes future price reversals, 1 is expected to be positive in the

current quarter and negative in some of the next four quarters.

(Insert Table 6 Here)

Fama-MacBeth regression results and t-statistics based on Newey-West procedures with

four lags for equation (8) are reported in Table 6. Mutual fund herding is positively related to

22
Market capitalization (Size), book-to-market ratio (BM), the previous 3-month returns (Ret-3,0), and the 9-month
returns preceding the filing quarter (Ret-12,-3) are not included in the control variables because the DGTW
characteristic-adjusted returns already account for size, book-to-market ratio, and momentum (Daniel et al., 1997).

23
stock returns in the current quarter regardless of whether the stock is associated with the close

following of hedge funds by mutual funds. Specifically, coefficients on both DFADJHERDMF

and DNFADJHERDMF are positive and significant at the 1 percent level (with t-statistics equal

to 8.92 and 7.80, respectively) in column 2. In the next quarter (column 4), the coefficient on

DFADJHERDMF is -0.0747 and significant (t = -2.84), indicating a sharp price reversal

associated with mutual funds following of hedge funds. In contrast, stocks for which mutual

funds do not closely follow hedge funds experience no significant price reversals in quarter +1:

the coefficient on DNFADJHERDMF is negative but not significant in column 4.

We also note a price reversal associated with mutual fund herding (ADJHERDMF) in

quarter 4 (column 10). However, this reversal does not result from mutual funds following of

hedge funds: the coefficient on DFADJHERDMF is close to 0 and statistically insignificant in

column 10. Instead, it is driven by stocks for which mutual funds do not closely herd after hedge

funds, judging from the negative and significant coefficient (t = -2.11) on DNFADJHERDMF in

column 10. BWW (2014) document the price reversals associated with mutual funds herding in

response to analyst recommendation revisions in quarters +3 and +4, and the above results in

Table 6 appear to be consistent with their findings or other factors unrelated to mutual funds

following of hedge funds.

One potential concern about the above price reversals is they may be driven by hedge

fund herding itself instead of mutual funds following of hedge funds. However, our findings do

not support this hypothesis: hedge fund herding (ADJHERDHF) has positive and significant

relations to next quarters stock returns in columns 3 and 4, whereas it is not associated with

price reversals in any quarters after that. This finding suggests that hedge fund herding contains

future-return-related information and speeds the stock price adjustment process. In other words,

24
in our sample, when mutual funds herd on hedge funds trading strategies in the last quarter, they

are following a public signal that is informative about future stock prices. Hence, the price

reversals we have documented above are likely to be driven by incentives unrelated to stock

fundamentals, such as fund managers reputational or career concerns, which we explore in more

details in Section 4.3.

Finally, it is worth highlighting that the price reversals associated with mutual funds

following of hedge funds documented in Table 6 are not driven by the specific construction of

the sample of stocks for which mutual funds closely herd after hedge funds. When requiring this

sample to include stocks in the top and bottom deciles or terciles (instead of quintiles) of current

quarters mutual fund herding and last quarters hedge fund herding, we obtain qualitatively

similar results. These results are not reported for brevity but available upon request.

In sum, our findings thus far are consistent with mutual funds herding after hedge funds

but not vice versa. Further, mutual funds following of hedge funds has significant destabilization

effects on stock prices in the first subsequent quarter.

4.2.2. Continuous Herding by Mutual Funds

Recall that in Table 3, the strongest predictor for mutual fund herding is its own value in

the last quarter, and there is a positive association between mutual fund and hedge fund herding

in the same quarter. These relations point to the possibility of a large overlapping between stocks

with close following of hedge funds by mutual funds and those with persistent mutual fund

herding over time. If this is true, the price reversals documented above may arise from

continuous herding of mutual funds instead of their following of hedge funds. We test this

possibility in this section as a robustness check.

We start with restricting the sample of stocks for which mutual funds closely herd after

25
hedge funds (constructed in Section 4.2.1) to those for which mutual funds do not closely herd

after themselves. Specifically, we exclude stocks in the top (bottom) quintiles of mutual fund

herding in both current and last quarters from the sample of stocks for which mutual funds

closely herd after hedge funds, and construct an indicator variable, DFH, for the remaining stocks.

This indicator variable captures the stocks for which mutual funds closely herd after hedge funds

but not after themselves. We also construct an indicator, DFM, for stocks in the top (bottom)

quintiles of mutual fund herding in both current and last quarters, and hedge fund herding in the

last quarter, to represent continuous herding by mutual funds. We then replace DF with (DFH +

DFM) and re-estimate equation (8). Fama-MacBeth regression results and t-statistics based on

Newey-West procedures with four lags are in Panel A of Table 7.

(Insert Table 7 Here)

Based on the results in this panel, the quarter +1 price reversals documented in Table 6

are driven by mutual funds following of hedge funds instead of their continuous herding.

Specifically, the coefficient on DFHADJHERDMF is 0.2946 and significant (t = 9.11) in column

1 (quarter 0), while it is -0.0826 and significant (t = -2.60) in column 2 (quarter +1).

Interestingly, we also find a price reversal in quarter +2 associated with continuous

herding by mutual funds: the coefficient on DFMADJHERDMF is 0.3144 and significant (t =

7.21) in column 1 (quarter 0), while it is -0.0570 and significant (t = -2.30) in column 3 (quarter

+2). This finding is consistent with the price destabilization effect of the continuous herding by

mutual funds, albeit with a smaller magnitude and longer time horizon than the effect of their

following of hedge funds. Further, consistent with results in Table 6, we find price reversals

among stocks for which mutual funds do not closely herd after hedge funds in quarter +4,

judging from the negative and significant coefficient on DNFADJHERDMF in column 5. The

26
above two types of price reversals related to mutual fund herding are not closely associated with

mutual funds following of hedge funds and therefore are not the focus of this paper.

In a similar vein to the argument made for the price impacts of continuous herding by

mutual funds, one may also argue for the possibility that price reversals documented in Section

4.2.1 are caused by continuous herding of hedge funds, which may exists for stocks with mutual

funds close following of hedge funds because of the positive correlation between

contemporaneous mutual fund and hedge fund herding. However, when we construct a sample

containing stocks in the top (bottom) quintiles of hedge fund herding in both current and last

quarters, there is no evidence of future price reversals among them. These results are nor

reported for brevity but available upon request.

4.2.3. Mutual Funds and Hedge Funds Herding on Common Information Signals

In Tables 3-4, we find a positive correlation between the contemporaneous mutual fund

and hedge fund herding. This finding indicates that these two fund groups may herd together in

response to common information signals about stocks. In this section, we examine whether our

results can be driven by such responses to common information (the common information

hypothesis).

Three pieces of evidence have arisen in our previous analyses indicating that the common

information hypothesis cannot explain the sequential herding behavior of mutual and hedge

funds and the associated price destabilization effect. First, there is an asymmetry in the two fund

groups sequential herding behavior in Tables 3-4: mutual funds herd after hedge funds, but not

vice versa. This asymmetry sustains over the course of at least two quarters, which is more than

sufficient for either fund group to respond to any information signal. Thus, it should not exist if

the two groups are purely responding to the same information signals. Second, we document

27
strong future return reversals among stocks for which mutual funds closely herd after hedge

funds, which should not exist if the two groups are purely responding to the same

stock-fundamental-related information signals. Third, the correlation between contemporaneous

mutual fund and hedge fund herding weakens dramatically after adding additional control

variables in BWW (2014) such as standardized unexpected earnings (SUE) and an indicator

variable for add/drop of the S&P 500 index, whereas these additional controls have no impacts

on the relationship between mutual fund herding and past hedge fund herding, suggesting the

two fund groups contemporaneously instead of sequentially (i.e., one group is slower than the

other) herd on the same information.

We conduct an additional test in this section on the common information hypothesis,

starting with decomposing mutual fund herding into three parts using two dummies. The first

dummy is DF, which is equal to 1 for stocks in the top (bottom) quintile of mutual fund herding

in the current quarter and in the top (bottom) quintile of hedge fund herding in the last quarter,

and 0 otherwise. The second dummy is denoted by DC, which is equal to 1 for stocks in the top

(bottom) quintiles of both mutual fund and hedge fund herding in the current quarter and 0

otherwise. Thus, DFADJHERDMF,t represents mutual fund herding in stocks experiencing heavy

following of hedge funds by mutual funds; DCADJHERDMF,t represents mutual fund herding in

stocks experiencing strong cotemporaneous herding between mutual and hedge funds; and

(1-DF-DC)ADJHERDMF,t represent the remaining stocks. If a stock belongs to both of the first

and second groups, we set DF to 0 to account for the possibility that such stocks drive the return

reversals documented for the first group in Table 6. If our main findings are driven by the

common information hypothesis, we expect the future return reversals in quarter +1 to exist

primarily among stocks in the second group.

28
 We run Fama-MacBeth regressions with Newey-West corrections of four lags of stock

returns in the current and next four quarters on the mutual fund herding in the above three stock

groups and control variables, and report results in Panel B of Table 7. They show that the

contemporaneous herding by mutual funds and hedge funds does not lead to future return

reversals, as can be seen from the insignificant coefficients on DCADJHERDMF,t in columns 2-5

of this panel. This finding suggests that when mutual funds and hedge funds herd in response to

common information, they do not destabilize stock prices. In contrast, the negative and

significant coefficient on DFADJHERDMF,t for quarter +1 (t = -2.59) is highly consistent with

Table 6, and illustrates the price destabilization effect of mutual funds following of hedge funds.

In sum, after accounting for the contemporaneous herding of the two fund groups, mutual funds

conditional herding based on hedge funds past herding behavior still leads to future return

reversals, suggesting that our results are not driven by the common information hypothesis.

4.3. Reputational Herding

Our findings in Section 4.2 on the price destabilization effects of mutual funds following

of hedge funds indicates that such following is likely to be (at least partially) motivated by

incentives unrelated to stock fundamentals, such as mutual fund managers reputation or career

concerns. For example, Graham (1999) and Prendgergast and Stole (1996) argue that high

reputation agents may herd more to look like smart decision makers, whereas Chevalier and

Ellison (1999) suggest that low reputation managers are more reluctant to deviate from the crowd

because of concerns about job security. Thus, in this section, we examine the relationship

between the intensity of mutual fund managers in following hedge funds and their reputation.

We begin with constructing a following intensity measure (FIM) to quantify how actively

a mutual fund adjusts its portfolio based on last quarters hedge fund herding. Drawing from the

29
momentum investing measure of Grinblatt, Titman, and Wermers (1995), we define FIM for

mutual fund n in quarter t as:23

FIM n,t i 1 ( wn,it wn,it 1 ) ADJHERD HF ,it 1
I
(9)

where I is the number of stocks herded by hedge funds in quarter t-1. wn,it is mutual fund ns

portfolio weight on stock i in quarter t. We focus on the total value of stocks held by the fund

instead of total net assets in calculating wn,it because our focus is the funds stock selection ability.

In addition, we follow Kacperczyk, Sialm, and Zheng (2005) and control for passive weight

changes stemming from price changes when computing active changes in portfolio weights.

wn,it 1 (1 Rit 1,t )

Specifically, wn,it 1 , where Rit-1,t is the return for stock i from quarter t-1
i 1 wn,it 1 (1 Rit 1,t )
I

to t. FIM can be broadly interpreted as the covariance between a mutual funds active portfolio

weight changes and last quarters hedge fund herding (which becomes public information

between t-1 and t), and a high FIM indicates a funds active buying (selling) of stocks with high

degree of buy-herding (sell-herding) by hedge funds in the last quarter.

We then conduct quarterly regressions of the above following intensity measure (FIM) on

a fund managers reputation, controlling for various fund characteristics. Drawing on Chevalier

and Ellison (1999) and BWW (2014), we measure a fund managers reputation by the four-factor

alpha (alpha) of her fund in the past 60 month. We choose the horizon of 60 months to capture

the long-term nature of reputation, while using the 36-months alpha (un-tabulated) yields

consistent results. The control variables include fund age (age), total net assets (TNA), portfolio

turnover rate (Portfolio Turnover), the funds idiosyncratic risk (Sigma), flow-performance

sensitivity (Flow Performance Sensitivity), average monthly flow (Flow), and the standard

23
See Ali et al. (2008) for more details about similar intensity measures of mutual funds information exploitation.

30
deviation of monthly flows (Flow Volatility). Fama-MacBeth regression results and t-statistics

based on Newey-West procedures with four lags are reported in columns 1 and 3 of Table 8.

(Insert Table 8 Here)

Results in these two columns suggest a positive link between a mutual fund managers

reputation and her intensity in following hedge funds. Specifically, in column 1, the coefficient

on the reputation measure, alpha, is positive and statistically significant (t = 2.51). In column 3,

we add the funds following intensity measures in the last two quarters to the control variables to

account for the persistence in funds following behavior, and obtain similar results to column 1.

Among the control variables, only the portfolio turnover rates of funds have significant

associations with their following intensity, judging from the positive and significant coefficients

on portfolio turnover. This finding indicates that more active fund managers tend to follow

hedge funds more.

We note that there may be a mechanical relation between the alpha of a mutual fund

manager and her tendency to follow hedge fund trades, if hedge funds are really skilled, as such

following can enhance her performance and reputation as a smart decision maker. In other words,

potential endogeneity between mutual funds skills and their tendency to follow hedge funds may

confound the results in columns 1 and 3 of Table 8. To account for such endogeneity, we

introduce a 2SLS model as a robustness test. Specifically, in the first stage, we use funds

expense ratios as an instrument for their alphas, and run quarterly regressions of fund alpha on

the expense ratio and other explanatory variables described above. The expense ratio is chosen as

the instrument because several studies (e.g., Tufano and Sevick, 1997; Carhart, 1997) have

shown that it is negatively related to fund alphas but unrelated to mutual funds tendency to

follow.

31
 In the second stage, we replace alpha with its fitted value from the first stage and re-run

the regressions in columns 1 and 3 of Table 8. The results are reported in columns 2 and 4. We

find that after accounting for the endogeneity between a mutual funds tendency to follow hedge

funds and its skill, the funds reputation is still positively related to its following intensity,

judging from the positive and significant coefficients on alpha. Overall, results in Table 8 are

consistent with the reputational herding models (e.g., Graham,1999; Prendgergast and Stole,

1996) contending that high reputation agents may herd more to protect their reputation as smart

decision makers.

Results in Table 8 also suggest that our evidence on mutual funds following of hedge

funds is not driven by funds that have sequential access to the same return-related information. If

a group of investors (e.g., hedge funds and skilled mutual funds) have access to information that

only becomes available to other investors later, herding of less skilled mutual funds are expected

to be more related to previous hedge fund herding than that of more skilled mutual funds.

However, as we have discussed above, our evidence is in contrast with this prediction in that

mutual funds with higher alphas herd after hedge funds more.

4.4. Persistence in Mutual Funds Following of Hedge Funds

Herding theories such as those discussed in Section 1 emphasize that the crowd behavior

is deliberate. If mutual funds deliberately pursue hedge funds trading strategies, they would

exhibit persistence over time in following hedge funds, which we examine in this section.

Starting from the following intensity measure (FIM) described in Section 4.3, we compute the

rolling averages of FIMs over the past four quarters (from quarter -3 to 0) and denote it by FIM4

to ensure that we capture intentional following instead of chance. In each quarter, funds are

sorted into deciles based on FIM4 with decile 1 (10) containing funds with the lowest (highest)

32
FIM4. We then construct dummy variables (D1-D10) for each decile and regress the FIMs in

each of the next four quarters on them. Fama-MacBeth regression results and t-statistics based on

Newey-West procedures with four lags are reported in Table 9.

(Insert Table 9 Here)

In all next four quarters (columns 1-4), coefficients on D8, D9, and D10 are positive and

statistically significant, indicating the persistence of following hedge funds by high-FIM4 mutual

funds (those in the top three deciles). In contrast, coefficients on other decile dummies are not

significant in any of the next four quarters, consistent with low-FIM4 mutual funds not

deliberately following hedge funds.

One may argue for the possibility that the persistence in the following intensity measure

documented above for the high FIM4 (the top 30 percent) mutual funds are driven by their

investment styles rather than the following of hedge funds. For example, funds in the top three

deciles of FIM4 may be those trading on information signals positively correlated with last

quarters hedge fund herding (such as return momentum). To address this concern, we construct

measures of funds trading intensity in book-to-market ratio, size, and return momentum, denoted

by SIZEIM4, BMIM4, and MOMIM4, respectively. They are calculated in the same way as FIM4,

except we use cross-sectional standardized values of log of market capitalization, book-to-market

ratio, and stock returns during the last three months to replace ADJHERDHF,-1 in equation (9).

The standardized values of these three variables are calculated by subtracting cross-sectional

mean from raw value, and then dividing the cross-sectional standard deviation, while not

standardizing these variables leads to qualitatively similar results. We then add these measures to

the regressions in the first four columns of Table 9 and report results in the last four columns.

They are highly consistent with those in columns 1-4, suggesting that the persistence in FIMs for

33
high-FIM4 mutual funds is indeed driven by their following of hedge funds instead of other

investment styles.

4.5. Deliberate Followers and the Price Destabilization Effect

Our finding in Section 4.4 on the persistence of following hedge funds among high-FIM4

mutual funds naturally raises the question on the sources of the price destabilization effect

documented in Section 4.2. If mutual funds following of hedge funds is indeed driven by

reputational reasons discussed in Section 4.3, these high-FIM4 funds are expected to herd more

intensely after hedge funds than other funds. Furthermore, the price reversals associated with

mutual funds following of hedge funds are expected to be more pronounced among stocks

herded by more mutual funds deliberately following hedge funds. We test these implications in

this section.

4.5.1. Deliberate Followers Herding Behavior

In each quarter, we classify a mutual fund as a deliberate follower if its average FIM in

previous four quarters (-4 to -1) falls into the top three deciles across all funds in the

corresponding time window.24 One can interpret this group of funds as the ones intentionally

following hedge funds in quarter 0. We then construct the adjusted-herding measures of these

deliberate followers for each stock, denoted by ADJHERD Followers,it , and replace ADJHERDMF,it

with it in equation (4) to examine whether the deliberate followers herd after hedge funds more

intensely than other funds. Fama-MacBeth regression results and t-statistics based on

Newey-West procedures with two lags are reported in column 1 of Table 10.

(Insert Table 10 Here)

Results in this column are consistent with deliberate followers intensely herding after

24
Recall our findings in Section 4.4 indicate persistence in following hedge funds among mutual funds with FIM4
ranked in the top three deciles.

34
hedge funds: the coefficient on ADJHERDHF, t-1 is 0.1792 and statistically significant at the 1

percent level (t = 19.46), indicating deliberate followers herd in the same direction as last

quarters hedge fund herding. This coefficient is greater and more significant statistically than the

coefficient on last quarters mutual fund herding (ADJHERDMF, t-1). In fact, last quarters hedge

fund herding is the most important determinant of the deliberate followers herding in this

column and its effect is stronger than those in Table 3.25 These results suggest that deliberate

followers herd after hedge funds more intensely than other funds.

To further highlight the role of deliberate followers in following hedge fund herd, we

construct an indicator variable, DM, which equals to 1 if a stock is in the top or bottom quintiles

of ADJHERD Followers,it (strong buy- and sell-herding by deliberate followers, respectively) and

zero otherwise. This indicator variable is then interacted with hedge fund herding (ADJHERDHF)

in the current and past two quarters, and these interaction terms are added to the explanatory

variables in equation (4) to explore whether mutual fund herding has higher correlation with past

hedge fund herding when deliberate followers herd intensely. These results are presented in

column 2 of Table 10 and are highly consistent with those in column 1: the coefficient on the

interaction term between the above dummy and last quarters hedge fund herding is positive and

statistically significant at the 1 percent level.

4.5.2. Changes in Deliberate Followers Herding Conditional on Hedge Fund Herding

Next, we explore the changes in deliberate and non-deliberate followers herding

conditional on hedge fund herding to further gauge the causal link from hedge funds herding to

mutual funds subsequent herding in following hedge funds. If deliberate followers indeed

persistently follow hedge funds, we expect to see the increase in their herding from the quarter
25
Recall that in Table 3, where we pool deliberate and non-deliberate followers together, last quarters hedge fund
herding has weaker effects on mutual fund herding than last quarters mutual fund herding, which motivates us to
differentiate between mutual funds following of hedge fund s and their continuous herding in Section 4.2.2.

35
prior to the hedge fund herding to the quarter after among stocks heavily herded by hedge funds.

To implement this idea, we sort stocks into three groups in each quarter based on the

hedge fund herding measure in the current quarter. The first group includes stocks experiencing

intense buy-herding by hedge funds: i.e., those with ADJHERDHF,t in the top quintile of the

quarter. The second group includes stocks experiencing intense sell-herding by hedge funds: i.e.,

those with ADJHERDHF,t in the bottom quintile. The last group includes the remaining stocks not

heavily herded by hedge funds.

(Insert Table 11 Here)

For each of the above three stock groups, we compute the mean herding measure in

quarters t-1, t, and t+1 for two mutual fund groups: the deliberate and non-deliberate followers.

This step is repeated for all quarters of the sample, and we obtain the time-series means of the

herding measures, as well as the time-series mean of the difference in herding measures between

quarters t+1 and t-1. The results for deliberate followers are presented in the top section of Table

11. For stocks experiencing intense buy-herding by hedge funds, deliberate followers

significantly increase the intensity in buy-herding in quarter t+1, judging from the positive and

significant difference between quarters t+1 and t-1 (t = 2.24). Similarly, for stocks experiencing

intense sell-herding by hedge funds, deliberate followers significantly increase the intensity in

sell-herding in quarter t+1. We do not observe any significant changes in deliberate followers

herding intensity for stocks not heavily herded by hedge funds.

(Insert Figure 1 Here)

A more direct illustration of the above changes in deliberate followers herding

conditional on hedge fund herding is provided in Figure 1, where we plot these funds herding in

quarters t-1, t, and t+1 for the three stock groups described above. As can been seen from this

36
figure, deliberate followers buy-herd more intensely after hedge funds engage in strong

buy-herding, and they sell-herd more intensely after hedge funds engage in strong sell-herding.

When we focus on non-deliberate followers in the bottom section of Table 11, we find

they either do not or respond in the opposite direction to hedge funds herding, based on the

insignificant differences in their herding intensities between quarters t-1 and t+1 for stocks not

heavily herded by hedge funds or stocks experiencing intense sell-herding by hedge funds, and

the negative and significant difference for stocks experiencing intense buy-herding by hedge

funds.

4.5.3. The Price Impacts of Deliberate Followers

This section focuses on the price impact of deliberate followers. We replace

ADJHERDMF,it with ADJHERD Followers,it in equation (8). Corresponding to this change, the

dummy DF in equation (8) is modified to be equal to 1 if a stock is in the top (bottom) quintiles

of both deliberate followers herding in the current quarter and hedge fund herding in the last

quarter, and zero otherwise. DNF= 1 - DF is also changed accordingly. In addition, we construct the

adjusted herding measure of mutual funds that are not deliberate followers,

F
ADJHERDNon-followers,it, and decompose it in the same manner using dummies DNon followers and

NF F
DNon followers, where DNon followers equals to 1 if a stock is in the top (bottom) quintiles of both

non-deliberate followers herding in the current quarter and hedge fund herding in the last quarter

followers 1 DNon followers. These decomposed herding measures are

NF F
and zero otherwise, and DNon

added to account for non-deliberate followers potential impacts on stock returns. We then

re-estimate equation (8) and report Fama-MacBeth regression results and t-statistics based on

Newey-West procedures with four lags in columns 1-5 of Table 12.

(Insert Table 12 Here)

37
 Results in these five columns are consistent with deliberate followers herding in

response to hedge fund herding is price destabilizing. Specifically, in quarter 0 (column 1), the

coefficient on DF ADJHERD Followers,it is 0.1947 and significant at the 1 percent level (with a

t-statistic of 7.96), indicating a strong price gain or loss among stocks for which deliberate

followers closely herd after hedge funds. In quarter 1 (column 2), the coefficient on DF

ADJHERD Followers,it is -0.0499 and significant (t = -2.68), suggesting a sharp price reversal. In

contrast, stocks for which deliberate followers do not closely herd after hedge funds experience

no price reversals in the next four quarters: none of the coefficients on DNF ADJHERD Followers,it

are significant in any of columns 2-5. We also note a price reversal occurring in the third quarter

subsequent to deliberate followers herding in response to hedge fund herding, which further

enhances the notion that deliberate followers have a destabilization effect on stock prices.

In un-tabulated analyses, we rerun all regressions in Table 7 using deliberate followers

adjusted herding measure to account for the possibility that price reversals in Table 12 are driven

by continuous herding by these followers or their herding on the common information signals

with hedge funds, and find no qualitative changes in our results. In other words, the above price

reversals are caused by deliberate followers response to hedge fund herding rather than the

time-series dependence of their own herding or the common information herding among

deliberate followers and hedge funds.

5. Conclusion

This paper examines whether mutual funds and hedge funds herd after each other and the

associated impacts on stock prices. We find strong evidence that mutual funds herd into or out of

stocks following the herd of hedge funds: mutual funds herding measure is positively related to

38
last quarters hedge fund herding. In contrast, hedge funds do not follow mutual funds. These

results are robust to excluding mutual funds predictable trades that are subject to front-running

by hedge funds.

Mutual funds following of hedge funds is associated with a significant price impact in

the same quarter and more importantly, a sharp price reversal in the next quarter, whereas hedge

fund herding itself does not destabilize prices. Further, a mutual funds following intensity

increases with its past performance. The top 30 percent of mutual funds most active in following

hedge funds does so persistently and drastically increase their subsequent herding in stocks

intensely herded by hedge funds. They are also the group driving the price reversals discussed

above. Our findings are consistent with high reputation mutual fund managers herding after

hedge funds and the associated price destabilization effects (e.g., Graham, 1999; Prendgergast

and Stole, 1996).

To our best knowledge, this paper is the first in the literature to examine whether and to

what extent mutual funds follow and herd after hedge funds, as well as the motivations for such

following behavior. We are also the first to uncover the price impacts of mutual funds response

to hedge fund herding, thereby adding to the stock-price predictability literature.

39
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 Table 1: Mutual Fund Herding and Hedge Fund Herding
This table presents time-series means of cross-sectional summary statistics of quarterly herding measures of
hedge funds for stocks traded by at least five hedge funds (Panel A) and those of mutual funds for stocks
traded by at least five mutual funds (Panel B). The sample period is 2000:Q1-2007:Q2. HMit = | pit E[Pit]| -
E|pit E[Pit]|, where pit is the proportion of funds buying stock i in quarter t, E[Pit] is the average proportion
of funds buying across all stocks in quarter t, and E|pit E[Pit]| is an adjustment factor. BHMit= HMit |
pit>E[pit], and SHMit =HMit | pit<E[pit]. ADJHERD is constructed by subtracting the minimum value of
BHM from each buy-herding stocks BHM, and subtracting the minimum value of SHM from each sell-herding
stocks SHM, and multiplying the latter by -1. Net Trade is the difference between the total shares bought and
total shares sold, divided by the total shares outstanding.

Panel A: Hedge Fund Herding

HMHF BHMHF SHMHF ADJHERDHF No. of Trading HFs Net Trade
Mean 1.30% 1.20% 1.39% -2.38% 14 0.10%
Std. 10.33% 10.00% 10.28% 17.34% 10 2.07%
25th -6.47% -7.19% -7.40% -14.74% 7 -0.48%
Median -0.47% -0.45% -0.15% -1.25% 11 0.03%
75th 7.41% 7.37% 6.96% 9.48% 17 0.63%

Panel B: Mutual Fund Herding

HMMF BHMMF SHMMF ADJHERDMF No. of Trading MFs Net Trade
Mean 3.32% 3.41% 3.18% -0.39% 47 0.28%
Std. 9.09% 9.08% 8.96% 18.58% 51 2.61%
25th -2.87% -2.69% -2.64% -15.10% 15 -0.71%
Median 1.65% 1.80% 1.61% 0.53% 31 0.17%
75th 7.92% 8.54% 7.49% 14.03% 58 1.26%

44
 Table 2: Summary Statistics
This table reports summary statistics for characteristics of stocks traded by at least five hedge funds. The
sample period is 2000:Q1-2007:Q2. Size is market capitalization. BM is the ratio of book value to market value
of equity as of the prior December. Std is the standard deviation of monthly returns over the previous 12
months. RET-3,0 is the cumulative return of the previous 3 months. RET-12,-3 is the cumulative return of the 9
months preceding the end of last quarter. Turnover is the mean monthly turnover ratio over the previous 12
months.

Size ($Mil) BM Std RET-12,-3 RET-3,0 Turnover

Mean 8,656.16 0.46 11.29% 18.51% 4.67% 0.20
Std. 26,031.05 0.35 7.47% 62.53% 26.91% 0.18
25th 814.32 0.26 6.53% -7.81% -6.83% 0.10
Median 2,001.69 0.40 9.43% 10.02% 3.26% 0.15
75th 5,863.62 0.58 13.81% 31.64% 14.00% 0.25
Number of Observations 32562

45
 Table 3: Do Mutual Funds Herd After Hedge Funds?
This table reports results from Fama-MacBeth regressions of mutual fund herding on past hedge fund herding.
The sample period is 2000:Q1 to 2007:Q2. ADJHERDHF, t is the adjusted herding measure for hedge funds in
quarter t. ADJHERDMF, t is the adjusted herding measure for mutual funds in quarter t. ADJHERDHF,t-1 is the
one-quarter lagged adjusted herding measure for hedge funds. ADJHERDHF,t-2 is the two-quarter lagged
adjusted herding measure for hedge funds. ADJHERDMF,t-1 is the one-quarter lagged adjusted herding measure
for mutual funds. ADJHERDMF,t-2 is the two-quarter lagged adjusted herding measure for mutual funds. Log
BM is the log of book-to-market ratio of prior December. Log Size is the log market capitalization in last
quarter. Turnover is the mean monthly turnover ratio over the previous 12 months. RET-3,0 is the cumulative
return of the previous 3 months. RET-12,-3 is the cumulative return of the 9 months preceding the end of last
quarter. Std is the standard deviation of monthly returns during the previous 12 months. The time-series
average coefficients and t-statistics based on standard errors using the Newey-West procedure with two lags (in
parentheses) are reported. Coefficients statistically significant at 5% are in bold.

Dependent Variable: ADJHERDMF, t

(1) (2) (3) (4)
Intercept 0.1136 0.1138 0.1119 0.0972
(3.22) (3.24) (3.19) (3.22)
0.0145 0.0146 0.0143 0.0128
Log BM
(6.75) (7.08) (6.98) (6.70)
-0.0074 -0.0074 -0.0072 -0.0063
Log Size
(-2.73) (-2.73) (-2.70) (-2.65)
Turnover -0.0937 -0.0924 -0.0914 -0.0796
(-6.54) (-6.58) (-6.66) (-6.12)
0.2141 0.2126 0.2129 0.2049
RET-3,0
(12.62) (12.69) (12.73) (12.68)
RET-12,-3 0.0258 0.0256 0.0245 0.0120
(5.50) (5.41) (5.10) (2.64)
-0.0061 -0.0063 -0.0050 -0.0029
Std
(-0.10) (-0.10) (-0.08) (-0.06)
0.0269 0.0305 0.0289
ADJHERDHF,t
(2.88) (3.33) (2.86)
0.0241 0.0195
ADJHERDHF,t-1
(3.74) (2.70)
0.0186 0.0155
ADJHERDHF,t-2
(3.59) (2.81)
0.1415
ADJHERDMF,t-1
(14.42)
-0.0119
ADJHERDMF,t-2
(-1.22)
Average N Per Qtr 879 879 879 879
R2 0.11 0.12 0.13 0.15

46
 Table 4: Do Hedge Funds Herd After Mutual Funds?
This table reports results from Fama-MacBeth regressions of hedge fund herding on past mutual fund herding.
The sample period is 2000:Q1 to 2007:Q2. ADJHERDHF, t is the adjusted herding measure for hedge funds in
quarter t. ADJHERDMF, t is the adjusted herding measure for mutual funds in quarter t. ADJHERDHF,t-1 is the
one-quarter lagged adjusted herding measure for hedge funds. ADJHERDHF,t-2 is the two-quarter lagged
adjusted herding measure for hedge funds. ADJHERDMF,t-1 is the one-quarter lagged adjusted herding measure
for mutual funds. ADJHERDMF,t-2 is the two-quarter lagged adjusted herding measure for mutual funds. Log
BM is the log of book-to-market ratio of prior December. Log Size is the log market capitalization in last
quarter. Turnover is the mean monthly turnover ratio over the previous 12 months. RET-3,0 is the cumulative
return of the previous 3 months. RET-12,-3 is the cumulative return of the 9 months preceding the end of last
quarter. Std is the standard deviation of monthly returns during the previous 12 months. The time-series
average coefficients and t-statistics based on standard errors using the Newey-West procedure with two lags (in
parentheses) are reported. Coefficients statistically significant at 5% are in bold.

Dependent Variable: ADJHERDHF, t

(1) (2) (3) (4)
Intercept -0.0367 -0.0402 -0.0448 -0.0409
(-1.22) (-1.35) (-1.48) (-1.33)
0.0021 0.0017 0.0018 0.0023
Log BM
(1.17) (0.97) (0.96) (1.18)
0.0007 0.0009 0.0012 0.0007
Log Size
(0.36) (0.45) (0.59) (0.33)
Turnover -0.0333 -0.0295 -0.0278 -0.0307
(-3.15) (-2.87) (-2.68) (-2.77)
0.0313 0.0239 0.0245 0.0192
RET-3,0
(2.32) (1.88) (1.90) (1.46)
RET-12,-3 0.0126 0.0117 0.0097 0.0112
(2.66) (2.38) (2.14) (2.16)
0.0043 0.0044 0.0047 0.0076
Std
(0.15) (0.15) (0.15) (0.25)
0.0311 0.0299 0.0334
ADJHERDMF,t
(2.72) (2.33) (2.71)
0.0067 0.0094
ADJHERDMF,t-1
(0.60) (0.91)
0.0085 0.0106
ADJHERDMF,t-2
(0.83) (1.09)
-0.1575
ADJHERDHF,t-1
(-15.34)
-0.0222
ADJHERDHF,t-2
(-4.38)
Average N Per Qtr 879 879 879 879
R2 0.02 0.03 0.03 0.06

47
 Table 5: The Non-flow-driven and Flow-driven Herding of Mutual Funds
Panel A of this table reports results from Fama-MacBeth regressions of non-flow-driven mutual fund herding
on past hedge fund herding, and Panel B reports results from Fama-MacBeth regressions of hedge fund
herding on past non-flow-driven mutual fund herding. The sample period is 2000:Q1 to 2007:Q2. ADJHERDHF,
t is the adjusted herding measure for hedge funds in quarter t. ADJHERDMF, t is the adjusted herding measure
for mutual funds in quarter t. ADJHERDMF,Nonflow,t is the adjusted herding measure for mutual funds
non-flow-driven trading in quarter t.3. ADJHERDMF,Flow,t is the adjusted herding measure for mutual funds
flow-driven trading in quarter t. Please refer to Section 4.1.3 for the construction of these two measures. Log
BM is the log of book-to-market ratio of prior December. Log Size is the log market capitalization in last
quarter. Turnover is the mean monthly turnover ratio over the previous 12 months. RET-3,0 is the cumulative
return of the previous 3 months. RET-12,-3 is the cumulative return of the 9 months preceding the end of last
quarter. Std is the standard deviation of monthly returns during the previous 12 months. The time-series
average coefficients and t-statistics based on standard errors using the Newey-West procedure with two lags (in
parentheses) are reported. Coefficients statistically significant at 5% are in bold.

Panel A: Do Mutual Funds Herd After Hedge Funds?

Dependent Variable: ADJHERDMF,Nonflow, t
(1) (2)
Intercept -0.0368 -0.0373
(-0.58) (-0.54)
-0.0063 -0.0041
Log BM
(-2.00) (-1.69)
0.0006 0.0013
Log Size
(0.12) (0.25)
Turnover -0.0347 -0.0370
(-2.44) (-2.60)
0.2133 0.2157
RET-3,0
(13.66) (14.24)
RET-12,-3 0.0254 0.0260
(3.60) (3.59)
0.1642 0.1384
Std
(3.19) (2.82)
0.0163 0.0165
ADJHERDHF,t
(1.95) (2.00)
0.0223 0.0230
ADJHERDHF,t-1
(2.43) (2.63)
0.0137 0.0132
ADJHERDHF,t-2
(1.90) (1.88)
0.1265 0.1224
ADJHERDMF,Nonflow,t-1
(12.36) (12.52)
-0.0263 -.0.0276
ADJHERDMF,Nonflow,t-2
(-3.41) (-4.07)
0.0018
ADJHERDMF,Flow,t-1
(0.09)
-0.0012
ADJHERDMF,Flow,t-2
(-0.10)
Average N Per Qtr 879 879
R2 0.15 0.16

48
Panel B: Do Hedge Funds Herd After Mutual Funds?
Dependent Variable: ADJHERDHF, t
(1) (2)
Intercept -0.0298 -0.0532
(-1.00) (-1.65)
0.0033 0.0006
Log BM
(1.78) (0.28)
0.0000 0.0014
Log Size
(0.02) (0.62)
Turnover -0.0346 -0.0269
(-3.02) (-2.38)
0.0228 0.0223
RET-3,0
(1.68) (1.67)
RET-12,-3 0.0128 0.0117
(2.53) (2.26)
0.0018 0.0136
Std
(0.06) (0.41)
0.0201 0.0207
ADJHERDMF,Nonflow,t
(1.83) (1.90)
0.0040 0.0079
ADJHERDMF,Nonflow,t-1
(0.36) (0.71)
0.0030 0.0052
ADJHERDMF,Nonflow,t-2
(0.32) (0.54)
-0.1566 -0.1565
ADJHERDHF,t-1
(-15.18) (-15.50)
-0.0208 -0.0215
ADJHERDHF,t-2
(-4.13) (-4.40)
0.0072
ADJHERDMF,Flow,t-1
(0.49)
0.0151
ADJHERDMF,Flow,t-2
(1.05)
Average N Per Qtr 879 879
R2 0.06 0.06

49
 Table 6: The Price Impact of Mutual Fund Herding in Response to Hedge Fund Herding
This table presents results on the price impact of mutual funds following of hedge funds. The sample period is 2000:Q1 to
2007:Q2. The dependent variable is the quarterly DGTW (1997) characteristic adjusted abnormal returns in quarter t through
quarter t+4. ADJHERDMF, t is mutual funds herding measure in quarter t. In each quarter, stocks are sorted into quintiles based
on hedge funds adjusted herding measures in the last quarter (ADJHERDHF,t-1) and mutual funds adjusted herding measures in
the current quarter (ADJHERDMF, t), respectively. DF is a dummy equal to one if a stock is in the top (bottom) quintiles of both
ADJHERDHF,t-1 and ADJHERDMF, t, and zero otherwise. DNF=1- DF. ADJHERDHF, t is the adjusted herding measure for hedge
funds in quarter t. ADJHERDMF,t-1 is the one-quarter lagged adjusted herding measure for mutual funds. Turnover is the mean
monthly turnover ratio over the previous 12 months. Std is the standard deviation of monthly returns during the previous 12
months. Profit Change is the change in industry-mean-adjusted return on assets (ROA) between quarter t+k and t+k-1 (k = 0, 1,
2, 3, 4), where industries are defined by 2-digit SIC codes. The time-series average coefficients and t-statistics based on
standard errors using the Newey-West procedure with four lags (in parentheses) are reported. Coefficients statistically
significant at 5% are in bold.

Dependent Variable: DGTW Adjusted Return in Quarter t+ k

k=0 k=+1 k=+2 k=+3 k=+4
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
-0.0133 -0.0136 -0.0009 -0.0004 0.0001 -0.0022 -0.0008 -0.0039 0.0042 0.0016
Intercept
(-0.96) (-0.95) (-0.08) (-0.04) (0.01) (-0.21) (-0.08) (-0.39) (0.44) (0.16)
-0.0378 -0.0442 -0.0217 -0.0147 -0.0077 -0.0032 0.0173 0.0305 0.0288 0.0184
Turnover
(-3.07) (-4.07) (-0.93) (-0.67) (-0.39) (-0.18) (0.69) (1.08) (1.14) (0.93)
0.2238 0.2159 0.0601 0.0496 0.0028 -0.0206 -0.0258 -0.0167 -0.0388 -0.0047
Std
(2.15) (2.02) (0.64) (0.53) (0.03) (-0.25) (-0.32) (-0.21) (-0.53) (-0.07)
-0.0001 -0.0001 0.0005 0.0002 0.0002 0.0001 0.0001 0.0001 0.0002 0.0002
Profit Change
(-0.20) (-0.04) (1.38) (1.28) (1.78) (1.50) (1.18) (1.09) (1.89) (1.65)
0.0126 0.0046 -0.0062 0.0106 0.0045 -0.0035 0.0128 0.0166 0.0111 0.0082
ADJHERDHF,t-1
(1.44) (0.42) (-0.63) (1.01) (0.56) (-0.39) (1.85) (1.76) (1.17) (0.83)
-0.0483 -0.0497 0.0289 0.0319 -0.0034 -0.0006 0.0052 0.0018 0.0024 0.0061
ADJHERDHF,t
(-1.89) (-1.97) (4.11) (4.50) (-0.32) (-0.05) (0.74) (0.25) (0.34) (0.84)
-0.0446 -0.0540 -0.0119 -0.0110 -0.0214 -0.0176 -0.0297 -0.0294 -0.0061 -0.0009
ADJHERDMF,t-1
(-3.01) (-2.55) (-1.28) (-1.08) (-1.75) (-1.46) (-2.03) (-1.96) (-0.62) (-0.10)
0.2722 -0.0185 -0.0167 -0.0166 -0.0241
ADJHERDMF,t
(8.54) (-1.58) (-1.44) (-1.21) (-2.05)
0.3040 -0.0747 -0.0010 -0.0255 -0.0004
DF*ADJHERDMF, t
(8.92) (-2.84) (-0.04) (-1.17) (-0.01)
0.2622 -0.0108 -0.0218 -0.0072 -0.0229
DNF*ADJHERDMF,t
(7.80) (-0.99) (-1.70) (-0.51) (-2.11)
Average N Per Qtr 879 879 879 879 879 879 879 879 879 879
R2 0.12 0.13 0.05 0.06 0.04 0.05 0.04 0.04 0.04 0.04

50
 Table 7: Mutual Funds Continuous Herding, and Mutual and Hedge Funds Herding on the Same
Information Signals
Panel A of this table presents results on the price impact of mutual funds following of hedge funds and their
continuous herding. Panel B presents results on the price impact of mutual funds following of hedge funds and
their herding after the same information signals as hedge funds. The sample period is 2000:Q1 to 2007:Q2.
The dependent variables are the quarterly DGTW (1997) characteristic adjusted abnormal returns in quarter t
through quarter t+4. ADJHERDMF, t is mutual funds herding measure in quarter t. In Panel A, stocks are sorted
into quintiles in each quarter based on hedge funds adjusted herding measure in the last quarter
(ADJHERDHF,t-1), mutual funds adjusted herding measure in the last quarter (ADJHERDMF,t-1), and mutual
funds adjusted herding measures in the current quarter (ADJHERDMF, t), respectively. DFH is a dummy equal to
one if a stock is in the top (bottom) quintiles of both ADJHERDHF,t-1 and ADJHERDMF, t but not in the
corresponding quintile of ADJHERDMF,t-1, and zero otherwise. DFM is a dummy equal to one if a stock is in the
top (bottom) quintiles of ADJHERDHF,t-1, ADJHERDMF, t, and ADJHERDMF,t-1, and zero otherwise. DNF=1- DFH
- DFM. In Panel B, stocks are sorted into quintiles in each quarter based on hedge funds adjusted herding
measure in the last quarter (ADJHERDHF,t-1), mutual funds adjusted herding measure in the current quarter
(ADJHERDMF,t), and hedge funds adjusted herding measures in the current quarter (ADJHERDHF, t),
respectively. DF is a dummy equal to one if a stock is in the top (bottom) quintiles of both ADJHERDHF,t-1 and
ADJHERDMF, t but not in the corresponding quintile of ADJHERDHF,t, and zero otherwise. DC is a dummy
equal to one if a stock is in the top (bottom) quintiles of ADJHERDHF,t and ADJHERDMF, t, and zero otherwise.
DNH=1- DF DC. Turnover is the mean monthly turnover ratio over the previous 12 months. Std is the standard
deviation of monthly returns during the previous 12 months. Profit Change is the change in
industry-mean-adjusted return on assets (ROA) between quarter t+k and t+k-1 (k =0,1,2,3,4), where industries
are defined by 2-digit SIC codes. The time-series average coefficients and t-statistics based on standard errors
using the Newey-West procedure with four lags (in parentheses) are reported. Coefficients statistically
significant at 5% are in bold.

Panel A: Mutual Funds Continuous Herding

Dependent Variable: DGTW Adjusted Return in Quarter t+k
(1) (2) (3) (4) (5)
k=0 k=+1 k=+2 k=+3 k=+4
-0.0141 -0.0009 0.0019 -0.0035 0.0011
Intercept
(-1.01) (-0.08) (0.18) (-0.35) (0.11)
-0.0448 -0.0142 -0.0029 0.0309 0.0181
Turnover
(-4.03) (-0.65) (-0.16) (1.07) (0.93)
0.2179 0.0486 -0.0209 -0.0178 -0.0028
Std
(2.04) (0.51) (-0.26) (-0.22) (-0.04)
0.0000 0.0002 0.0001 0.0001 0.0002
Profit Change
(0.01) (1.27) (1.48) (1.06) (1.62)
-0.0108 0.0064 -0.0072 0.0150 0.0107
ADJHERDHF,t-1
(1.04) (0.66) (-0.90) (1.51) (1.07)
-0.0503 0.0323 -0.0003 0.0019 0.0063
ADJHERDHF,t
(-2.00) (4.55) (-0.02) (0.26) (0.85)
-0.0615 -0.0130 -0.0099 -0.0273 -0.0035
ADJHERDMF,t-1
(-4.38) (-1.32) (-0.79) (-2.27) (-0.36)
0.2946 -0.0826 0.0287 -0.0220 -0.0055
DFH*ADJHERDMF,t
(9.11) (-2.60) (1.68) (-0.77) (-0.18)
0.3144 -0.0268 -0.0570 -0.0189 -0.0026
DFM*ADJHERDMF,t
(7.21) (-1.28) (-2.30) (-0.63) (-0.13)
0.2557 -0.0127 -0.0179 -0.0043 -0.0251
DNF*ADJHERDMF,t
(7.93) (-1.17) (-1.36) (-0.32) (-2.37)
Average N Per Qtr 879 879 879 879 879
R2 0.15 0.05 0.05 0.05 0.04

51
Panel B: Mutual and Hedge Funds Herding on the Same Information Signals
Dependent Variable: DGTW Adjusted Return in Quarter t+k
(1) (2) (3) (4) (5)
k=0 k=+1 k=+2 k=+3 k=+4
-0.0136 -0.0001 0.0020 -0.0037 0.0012
Intercept
(-0.96) (-0.01) (0.19) (-0.37) (0.12)
-0.0459 -0.0146 -0.0033 0.0307 0.0191
Turnover
(-4.10) (-0.66) (-0.19) (1.09) (0.96)
0.2179 0.0480 -0.0191 -0.0176 -0.0048
Std
(2.03) (0.51) (-0.24) (-0.22) (-0.07)
0.0000 0.0002 0.0001 0.0001 0.0002
Profit Change
(0.03) (1.31) (1.52) (1.05) (1.64)
0.0031 0.0111 -0.0035 0.0167 0.0090
ADJHERDHF,t-1
(0.28) (1.04) (-0.40) (1.77) (0.91)
-0.0620 0.0282 -0.0004 0.0054 0.0043
ADJHERDHF,t
(-2.59) (2.76) (-0.03) (0.68) (0.62)
-0.0530 -0.0107 -0.0172 -0.0295 -0.0016
ADJHERDMF,t-1
(-3.99) (-1.07) (-1.43) (-1.97) (-0.18)
0.2457 -0.0759 0.0022 -0.0199 0.0010
DF*ADJHERDMF,t
(8.56) (-2.59) (0.10) (-0.96) (0.03)
0.2575 0.0043 -0.0103 -0.0171 -0.0133
DC*ADJHERDMF,t
(6.75) (0.19) (-0.52) (-0.85) (-0.84)
0.2479 -0.0155 -0.0239 -0.0012 -0.0217
DNH*ADJHERDMF,t
(8.03) (-1.31) (-1.85) (-0.08) (-1.96)
Average N Per Qtr 879 879 879 879 879
R2 0.12 0.05 0.05 0.04 0.04

52
 Table 8: Reputational Herding
This table presents results on the relationship between mutual funds past performance and their intensity in
following hedge funds. The sample period is 2000:Q1- 2007:Q2. For mutual fund n in quarter t, its
following intensity measure (FIM) in following hedge funds is

FIM n,t i 1 ( wn,it wn,it 1 ) ADJHERD HF ,it 1 , where wn,it is the portfolio weight of stock i in the fund
I

at the end of quarter t, wn ,it 1 is the adjusted portfolio weight of stock i in the fund at the end of quarter t-1,
defined as: w wn ,it 1 (1 Rit 1,t )
n ,it 1 , with Rit-1,t being the return for stock i from quarter t-1 to t.

I
i 1
wn ,it 1 (1 Rit 1,t )
ADJHERDHF, i t-1 is the adjusted hedge fund herding measure for stock i in quarter t-1. Age is the number of
quarters since a fund appears in the CRSP Mutual Fund database. TNA is total net assets under management.
Portfolio Turnover is the funds portfolio turnover rate. Alpha is the four-factor alpha in the past 60 months.
Sigma is the standard deviation of the residual errors of the 4-factor model using proceeding 36 months
return data. Flow Performance Sensitivity is the sensitivity of the investment flow into the mutual fund to
the funds past performance. Flow is the average monthly flows in the past 12 months. Flow Volatility is the
standard deviation of the funds monthly flows over the past 12 months. In models (2) and (4), we use a
2SLS model where the instrument for alpha is the funds expense ratio. The time-series average
coefficients and t-statistics based on standard errors using the Newey-West procedure with four lags (in
parentheses) are presented. Coefficients statistically significant at 5% are in bold.
Dependent Variable: FIMt
(1) (2) (3) (4)
F-M 2SLS F-M 2SLS
-0.0002 -0.0009 -0.0003 -0.0021
Intercept
(-0.60) (-0.34) (-0.75) (-0.66)
0.0000 -0.0001 0.0000 -0.0007
Log Age
(-0.16) (-0.05) (0.04) (-0.35)
0.0000 0.0000 0.0000 0.0003
Log TNA
(-0.21) (0.48) (0.16) (0.33)
0.0003 0.0002 0.0002 0.0002
Portfolio Turnover
(2.96) (2.43) (2.84) (2.36)
0.0125 0.0287 0.0117 0.016
Alpha
(2.51) (2.02) (2.49) (1.93)
0.0107 0.0159 0.0104 0.0651
Sigma
(0.72) (0.13) (0.73) (0.45)
0.0000 0.0000 0.0000 0.0000
Flow Performance Sensitivity
(0.81) (-0.11) (0.90) (-0.46)
0.0008 -0.0003 0.0009 0.0227
Flow
(0.32) (-0.01) (0.37) (0.33)
-0.0005 0.0001 -0.0005 -0.0065
Flow Volatility
(-0.72) (0.01) (-0.69) (-0.33)
0.0376 0.0390
FIMt-1
(4.14) (4.38)
0.0053 0.0005
FIMt-2
(0.44) (0.05)
Average N (or Total N) 1283 34622 1283 34622
2
R 0.02 0.01 0.03 0.02

53
 Table 9: Persistence in Mutual Funds following of Hedge Funds
This table presents results on mutual funds persistence in following hedge funds. The sample period is
2000:Q1- 2007:Q2. For mutual fund n in quarter t, its following intensity measure (FIM) in following


I
hedge funds is FIM n,t ( wn,it wn,it 1 ) ADJHERD HF ,it 1 , where wn,it is the portfolio weight of
i 1

stock i in the fund at the end of quarter t, wn ,it 1 is the adjusted portfolio weight of stock i in the fund at the
wn ,it 1 (1 Rit 1,t )
n ,it 1
end of quarter t-1, defined as: w , with Rit-1,t being the return for stock i from

I
wn ,it 1 (1 Rit 1,t )
i 1
quarter t-1 to t. ADJHERDHF, i t-1 is the adjusted hedge fund herding measure for stock i in quarter t-1. In
each quarter, mutual funds are sorted into deciles based on their average FIM over the previous four
quarters (-3 to 0), denoted by FIM4. DN (N=1, 2 10) are dummy variables equal to 1 if a mutual fund
belongs to the Nth decile and zero otherwise. The dependent variable is mutual funds FIMs in quarter t + k
(k = 1,2,3,4). SIZEIM4, BMIM4, and MOMIM4 are calculated in the same way as FIM4, except that
ADJHERDHF, it-1 in the above equation is replaced by cross-sectionally standardized values of log of market
capitalization, book-to-market ratio, and stock returns during the last three months, respectively. The
time-series average coefficients and t-statistics based on standard errors using the Newey-West procedure
with four lags (in parentheses) are reported. Coefficients statistically significant at 5% are in bold.

Dependent Variable: FIM t+k

(1) (2) (3) (4) (5) (6) (7) (8)
k =+1 k=+2 k=+3 k=+4 k=+1 k=+2 k=+3 k=+4
-0.0001 0.0001 -0.0001 0.0002 -0.0001 0.0001 -0.0001 0.0002
D1t
(-0.31) (0.38) (-0.49) (0.57) (-0.37) (0.53) (-0.39) (0.74)
0.0003 0.0002 0.0001 0.0000 0.0003 0.0003 0.0002 0.0000
D2t
(1.10) (1.08) (1.25) (-0.03) (1.09) (1.15) (1.59) (0.04)
-0.0002 0.0000 0.0002 0.0001 -0.0002 0.0000 0.0002 0.0001
D3t
(-0.92) (-0.17) (0.89) (0.61) (-0.82) (-0.07) (1.03) (0.81)
0.0000 -0.0001 0.0001 0.0001 0.0000 -0.0001 0.0001 0.0000
D4t
(0.12) (-0.27) (0.26) (0.27) (0.08) (-0.32) (0.49) (0.28)
0.0002 0.0001 0.0003 0.0001 0.0002 0.0001 0.0003 0.0001
D5t
(1.15) (0.29) (1.47) (0.34) (1.05) (0.38) (1.67) (0.36)
0.0001 0.0000 0.0002 0.0002 0.0001 0.0000 0.0002 0.0002
D6t
(0.76) (-0.04) (1.00) (1.06) (0.80) (0.02) (1.27) (1.25)
0.0002 0.0000 -0.0003 0.0001 0.0002 0.0000 -0.0003 0.0002
D7t
(0.75) (-0.08) (-1.41) (0.81) (0.88) (0.09) (-1.36) (1.07)
0.0004 0.0007 0.0005 0.0005 0.0004 0.0007 0.0005 0.0006
D8t
(2.09) (3.01) (2.48) (2.22) (2.15) (3.00) (2.40) (2.35)
0.0007 0.0006 0.0009 0.0007 0.0007 0.0007 0.0010 0.0008
D9t
(2.53) (2.35) (4.07) (2.67) (2.68) (2.43) (3.97) (2.77)
0.0012 0.0010 0.0016 0.0012 0.0012 0.0011 0.0017 0.0012
D10t
(2.82) (2.34) (4.30) (3.15) (2.83) (2.41) (4.40) (3.25)
-0.0027 -0.0069 -0.0018 -0.0055
MOMIM4t
(-0.44) (-1.02) (-0.33) (-1.20)
0.0006 -0.0051 -0.0010 0.0058
BMIM4t
(0.21) (-1.27) (-0.20) (1.33)
-0.0002 0.0001 0.0002 -0.0002
SIZEIM4t
(-0.60) (0.62) (0.74) (-0.89)
Average N
1368 1368 1368 1368 1368 1368 1368 1368
Per Qtr
R2 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02

54
 Table 10: Do Deliberate Followers Herd After Hedge Funds?
This table reports results on deliberate followers herding in response to hedge fund herding. The sample
period is 2000:Q1 to 2007:Q2. A mutual fund is classified as a deliberate follower if its average following
intensity measure in following hedge funds (FIM) in the previous four quarters (-4 to -1) falls into the top
three deciles across all funds in the corresponding time window. ADJHERDFollowers,t is the adjusted herding
measure for deliberate followers in quarter t. DM is a dummy equal to 1 if a stock is in the top or bottom
quintiles of ADJHERDFollowers,t and zero otherwise. ADJHERDHF, t is the adjusted herding measure for
hedge funds in quarter t. ADJHERDHF,t-1 is the one-quarter lagged adjusted herding measure for hedge
funds. ADJHERDHF,t-2 is the two-quarter lagged adjusted herding measure for hedge funds. ADJHERDMF, t
is the adjusted herding measure for mutual funds in quarter t. ADJHERDMF,t-1 is the one-quarter lagged
adjusted herding measure for mutual funds. ADJHERDMF,t-2 is the two-quarter lagged adjusted herding
measure for mutual funds. Log BM is the log of book-to-market ratio of prior December. Log Size is the log
market capitalization in last quarter. Turnover is the mean monthly turnover ratio over the previous 12
months. RET-3,0 is the cumulative return of the previous 3 months. RET-12,-3 is the cumulative return of the 9
months preceding the end of last quarter. Std is the standard deviation of monthly returns during the
previous 12 months. The time-series average coefficients and t-statistics based on standard errors using the
Newey-West procedure with two lags (in parentheses) are reported. Coefficients statistically significant at 5%
are in bold.
(1) (2)
Dependent Variable: ADJHERDFollowers,t ADJHERDMF,t

Intercept 0.0764 0.0941

(2.61) (3.06)
0.0097 0.0128
Log BM
(3.53) (6.68)
-0.0044 -0.0061
Log Size
(-1.89) (-2.51)
-0.0583 -0.0756
Turnover
(-3.45) (-6.18)
RET-3,0 0.1619 0.1994
(10.29) (12.67)
RET-12,-3 0.0305 0.0116
(5.83) (2.46)
-0.0489 -0.0011
Std
(-0.80) (-0.02)
0.0304 0.0315
ADJHERDHF,t
(3.98) (2.76)
0.1792 -0.0143
ADJHERDHF,t-1
(19.46) (-1.84)
0.0288 0.0167
ADJHERDHF,t-2
(3.86) (1.97)
-0.0119
DM*ADJHERDHF,t
(-0.69)
0.1690
DM*ADJHERDHF,t-1
(14.46)
0.0077
DM*ADJHERDHF,t-2
(0.45)
0. 0955 0.1402
ADJHERDMF,t-1
(13.02) (14.46)
-0.0242 -0.0077
ADJHERDMF,t-2
(-2.63) (-0.45)
Average N Per Qtr 879 879
R2 0.13 0.16

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 Table 11: Mutual Fund Herding Conditional on Hedge Fund Herding
This table presents the changes in mutual fund herding conditional on hedge fund herding. The sample
period is 2000:Q1- 2007:Q2. A mutual fund is classified as a deliberate follower if its average following
intensity measure in following hedge funds (FIM) in the previous four quarters (-4 to -1) falls into the top
three deciles across all funds in the corresponding time window. ADJHERDHF, i ,t is the adjusted hedge fund
herding measure for stock i in quarter t. In each quarter, stocks are sorted into quintiles based on
ADJHERDHF, i ,t, and the mean mutual fund herding measure (ADJHERDMF) among deliberate and
non-deliberate followers for the top and bottom quintiles, as well as for the remaining stocks are computed
for quarters t-1, t, and t+1. The time-series averages of ADJHERDMF and the difference between quarters
t+1 and t-1, and t-statistics based on standard errors using the Newey-West procedure with four lags (in
parentheses) are reported. Coefficients statistically significant at 5% are in bold.

ADJHERDMF of deliberate followers

(1) (2) (3) (4)
N t-1 t t+1 (3)-(1)
Stocks in top quintile of ADJHERDHF, i t 155 -0.0205 -0.0300 0.0106 0.0216
(-1.58) (-1.63) (1.97) (2.24)
Stocks not in top or bottom quintiles of 562 -0.0189 -0.0229 -0.0291 -0.0126
ADJHERDHF, i t
(-1.55) (-1.73) (-2.42) (-0.72)
Stocks in bottom quintile of ADJHERDHF, i t 162 -0.0228 -0.0552 -0.0765 -0.0563
(-2.46) (-4.59) (-6.25) (-3.03)

ADJHERDMF of non-deliberate followers

Stocks in top quintile of ADJHERDHF, i t 155 -0.0210 -0.0332 -0.0722 -0.0519
(-0.55) (-0.94) (-8.09) (-4.72)
Stocks not in top or bottom quintiles of 562 -0.0214 -0.0367 -0.0427 -0.0227
ADJHERDHF, i t
(-0.39) (-1.96) (-2.71) (-1.43)
Stocks in bottom quintile of ADJHERDHF, i t 162 -0.0359 -0.0731 -0.0236 0.0023
(-2.75) (-5.80) (-1.45) (0.11)

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 Table 12: The Price Impact of Deliberate Followers
This table presents evidence on the price impact of deliberate followers. The sample period is 2000:Q1 to
2007:Q2. A mutual fund is classified as a deliberate follower if its average following intensity measure in
following hedge funds (FIM) in the previous four quarters (-4 to -1) falls into the top three deciles across all
funds in the corresponding time window. The remaining funds are classified into non-followers.
ADJHERDFollowers,t is the adjusted herding measure for deliberate followers in quarter t.
ADJHERDNon-followers,t is the adjusted herding measure for non-followers in quarter t. The dependent
variable is the quarterly DGTW (1997) characteristic adjusted abnormal returns in quarter t through quarter
t+4. DF is a dummy equal to 1 if a stock is in the top (bottom) quintiles of both deliberate followers
herding in the current quarter (ADJHERDFollowers,t) and hedge fund herding in the last quarter
F
(ADJHERDHF,t-1), and zero otherwise. DNF= 1 - DF. DNon followers is a dummy equal to 1 if a stock is in
the top (bottom) quintiles of both non-deliberate followers herding in the current quarter
(ADJHERDNon-followers,t) and hedge fund herding in the last quarter (ADJHERDHF,t-1), and zero otherwise.
followers 1 DNon followers. ADJHERDHF, t is the adjusted herding measure for hedge funds in quarter
NF F
DNon
t. ADJHERDMF,t-1 is the one-quarter lagged adjusted herding measure for mutual funds. Turnover is the
mean monthly turnover ratio over the previous 12 months. Std is the standard deviation of monthly returns
during the previous 12 months. Profit Change is the change in industry-mean-adjusted return on assets
(ROA) between quarter t+k and t+k-1 (k =0,1,2,3,4), where industries are defined by 2-digit SIC codes. The
time-series average coefficients and t-statistics based on standard errors using the Newey-West procedure
with four lags (in parentheses) are reported. Coefficients statistically significant at 5% are in bold.

57
 Dependent Variable: DGTW Adjusted Return in Quarter t+k
(1) (2) (3) (4) (5)
k=0 k=+1 k=+2 k=+3 k=+4
-0.0150 -0.0015 0.0005 0.0005 0.0032
Intercept
(-1.07) (-0.13) (0.04) (0.04) (0.33)
-0.0379 -0.0178 -0.0054 0.0184 0.0333
Turnover
(-2.99) (-0.71) (-0.25) (0.64) (1.41)
0.2607 0.0638 -0.0028 -0.0347 -0.0345
Std
(2.31) (0.66) (-0.03) (-0.40) (-0.47)
-0.0001 0.0006 0.0002 0.0001 0.0002
Profit Change
(-0.31) (1.55) (1.75) (1.43) (1.84)
0.0052 0.0074 0.0014 0.0171 0.0076
ADJHERDHF,t-1
(0.47) (0.62) (0.16) (1.98) (0.77)
-0.0608 0.0286 -0.0057 0.0044 0.0059
ADJHERDHF,t
(-2.62) (3.74) (-0.57) (0.59) (0.81)
-0.0432 -0.0144 -0.0200 -0.0336 -0.0087
ADJHERDMF,t-1
(-2.78) (-1.55) (-1.54) (-2.41) (-0.81)
F 0.1406 -0.0241 -0.0103 -0.0141 -0.0069
DNon followers*ADJHERDNon-followers,t (-1.25) (-0.76) (-0.94) (-0.43)
(6.23)
NF 0.1665 0.0016 0.0068 0.0007 -0.0016
DNon followers*ADJHERD Non-followers,t (0.14) (0.74) (0.06) (-0.15)
(5.42)
0.1947 -0.0499 0.0037 -0.0108 -0.0113
DF*ADJHERDFollowers,t
(7.96) (-2.68) (0.14) (-1.98) (-0.66)
0.1729 -0.0052 -0.0270 -0.0200 -0.0204
DNF*ADJHERDFollowers,t
(11.07) (-0.51) (-1.35) (-1.52) (-1.49)
Average N Per Qtr 879 879 879 879 879
R2 0.14 0.05 0.05 0.05 0.04

58
 ADJHERDFollower

0.02

-0.02

-0.04

-0.06

-0.08

-0.1
t-1 t t+1
Stocks that are intensively buy-herded by hedge funds in quarter t
Other Stocks
Stocks that are intensively sell-herded by hedge funds in quarter t

Figure 1: Deliberate Followers Herding Before and After Hedge Fund Herding
This figure plots the deliberate followers herding measure, denoted by ADJHERDFollowers, over three
periods (t-1, t, and t+1) in three groups of stocks that experience different levels of hedge fund herding in
quarter t. The sample period is 2000:Q1 to 2007:Q2. In each quarter, stocks are sorted into quintiles based
on hedge fund herding (ADJHERDHF, i ,t). The top quintile contains the stocks that are intensely buy-herded
by hedge funds. The bottom quintile contains the stocks that are intensely sell-herded by hedge funds. The
remaining stocks are classified as other stocks. The time-series means of ADJHERDFollowers in quarters t-1,
t, and t+1 are computed for each stock group. A mutual fund is classified as a deliberate follower if its
average following intensity measure in following hedge funds (FIM) in the previous four quarters (-4 to -1)
falls into the top three deciles across all funds in the corresponding time window.

59