Herd Behavior in the Drybulk Market: An Empirical Analysis of the Decision to Enter and Exit the Market

Abstract

We examine whether investors herd in their decision to order new or scrap old vessels in the drybulk market. Our paper is seminal as herd behavior in the shipping markets has not been previously investigated. We decompose herding into unintentional and intentional, and test for herd behavior under asymmetric effects with respect to freight market states, risk-return and valuation profiles, cycle phases and liberal philosophy toward the ownership of vessels. We detect unintentional herd behavior during down freight markets and contraction phases. Furthermore, evidence supports that unintentional herding, when contracting new buildings, is contagious and spills over into the scrap market. Finally, asymmetric herd effects are evident between the old and new generation of shipowners, and during extreme risk-return and market valuation periods.

Keywords: herding, ship finance, contracting, scrapping

JEL Classification: G14, G15