To Follow or Not to Follow Peers’ Loan Decisions: Bank Loan Herding in Taiwan

30 Pages Posted: 16 Feb 2014

See all articles by Ralph Lu

Ralph Lu

Ming Chuan University - Department of Finance

Chung-Hua Shen

National Taiwan University - Department of Finance

Hao Fang

Hwa Hsia Institute of Technology - Department of Assets and Property Management

Date Written: February 09, 2014

Abstract

This study examines whether Taiwanese banks engage in loan herding. Our loan herding denotes industrial lending by a sufficient number of banks during each half-year period of 2002-2011. We calculate inter-temporal correlation between lending over two consecutive periods and decompose the correlation into the own following and other following. The latter constitutes loan herding. Our results demonstrate that the other cascade explains more than 90% of inter-temporal correlation, indicating the existence of loan herding. Then, we use the conscientious definition of the weight of bank loan portfolios to investigate whether bank loan herding still exists. Our results support again the existence of loan herding. Next, we explore four motivations for loan herding: informational cascade, investigative herding, reputational herding, and characteristic herding. Our results suggest that investigative herding, reputational herding, and characteristic herding are the likely drivers of the other cascade.

Keywords: Loan herding, lend herding, other cascade, habit lending, investigative herding.

JEL Classification: C21, D03, G02, G21.

Suggested Citation

Lu, Ralph Yang-Cheng and Shen, Chung-Hua and Fang, Hao, To Follow or Not to Follow Peers’ Loan Decisions: Bank Loan Herding in Taiwan (February 09, 2014). Available at SSRN: https://ssrn.com/abstract=2396443 or http://dx.doi.org/10.2139/ssrn.2396443

Ralph Yang-Cheng Lu (Contact Author)

Ming Chuan University - Department of Finance ( email )

Taiwan

Chung-Hua Shen

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Hao Fang

Hwa Hsia Institute of Technology - Department of Assets and Property Management ( email )

Zhonghe, Taipei County
Taiwan

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