Exploration into Banks’ Herding on Industrial Loans in Taiwan

Abstract

The study extends Sias’s (2004) method of analysing institutional investors’ inter-temporal herding in securities to examine whether the herding effect among banks in industrial lending exists in Taiwan, determine the reasons for herding among these banks, and examine whether their herding behavior differs across bullish and bearish periods and bank types. The study results demonstrate that the cascades among banks in Taiwan primarily result from their herding and that habit loans are not the primary factor in banks’ herding behaviors. Because banks are more likely to engage in herding behavior in lending to large-capitalization industries, their behaviors may stem from investigative herding. Moreover, our results show that banks’ cascades result primarily from their herding, which does not differ across bullish and bearish periods. Meanwhile, their herding behaviors are more significant for middle- and large-capitalization industries in bullish periods. The study also finds that private banks are more likely to follow the same type of bank classification, whereas public banks are more likely to follow a different type. Commercial banks are more likely to follow the same type of bank class, whereas SME (small and medium-sized enterprise) banks are more likely to follow a different type. This finding is consistent with reputation herding by commercial banks in Taiwan. Next, the study finds that banks outside the Taiwanese financial holding system are more likely to engage in a different type of herding, which may be evidence of characteristic herding among banks outside the financial holding system that follow those within the financial holding system. Finally, larger banks are more likely to follow banks of the same type, whereas smaller banks are more likely to follow different types of banks.

Keywords: Bank loan, Investigative herding, Reputation herding, Characteristic herding, Habit loan

JEL Classification: G20, G21