The relationship between herding behavior and firm size before and after the elimination of short-sale price restrictions

The present paper investigates the relationship between investor herding behavior and stock return under short-sale price restrictions. Detailed intra-day orders are applied to calculate herding measurements before and after a staged lifting of short-sale restrictions on May 16th, 2005 and September 23rd, 2013 in Taiwan. The former targeted the constituent stocks of the Taiwan 50 Index only, while the latter targeted all listed firms on the Taiwan Stock Exchange. Using the Chow test and the dynamic structural change point test to confirm the effect of ending these restrictions, the results found that short-sale restrictions increased individual herding behavior in the context of the stocks of small firms, especially those stocks in the low quantile of stock returns. Conversely, herding behavior was not shown to significantly impact the stock returns of large firms either before or after the end of short-sale price constraints for either individual or institutional investors.