Global/Industrial Diversification and Analyst Herding

The study we report examined herding behavior among security analysts in the 1980-98 period. Using panel data, we analyzed the impact of industrial and geographical diversification on herding among analysts. We compared the propensity toward herding of analysts covering domestic companies that are industrially focused and analysts focusing on companies that are diversified geographically and/or industrially. We provide evidence that herding is more pronounced among analysts concentrating on diversified companies. This result is consistent with the notion that herding behavior increases with task difficulty. Our results also show that herding among analysts reduces the market value of companies they cover, which indicates that the market penalizes herding behavior among security analysts. This effect was more pronounced for companies that are industrially and/or geographically diversified.