Sharing More than Dialects: Herding Behavior in Bank Risk-Taking Explained by Cultural Vicinity

71 Pages Posted: 2 Feb 2017

See all articles by Barbara Seitz

Barbara Seitz

University of St. Gallen

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

Alfred Lameli

University of Marburg

Tobias Gaugler

University of Augsburg

Date Written: February 1, 2017

Abstract

We expand on research concerning the well-pronounced influence of geographical peer groups on human behavior. For this purpose, bank-specific risk-taking behavior and its relation to culturally close banks – measured by geographical as well as linguistic distance – is examined. We hypothesize that the level of risk taken by an distinct bank can be explained by the risk-taking behavior of other culturally close banks. Using a complete panel survey of all 1,111 separate and independent German cooperative banks from 2007 to 2010, we show with a high level of significance that banks adapt to the behavior of their culturally defined peer group. Interestingly, linguistic distance is superior to the geographical proxy. Results are robust after controlling for typical macroeconomic, bank specific, and – to eliminate unintentional herding – regional determinants. Our results are also robust to common econometrical and economic specifications. We amend existing literature on geographical herding firstly by a full census of German cooperative banks. As each cooperative bank is privileged with territorial exclusivity, our research is based on an intersect-free full coverage of the entire national territory. Secondly, we are able to refine research on geographical herding by measuring cultural vicinity via linguistic, i.e. dialect, proximity. Based on the evidence of banks selecting their peer group not by a “best-in-class” approach, but rather by dialectical proximity, we can show evidence of irrational herding resulting from psychosociological phenomena, such as mere exposure, as well as conformity effects.

Keywords: Behavioral finance, herding, bank risk-taking, linguistics, cultural area, German cooperative banks

JEL Classification: G02

Suggested Citation

Seitz, Barbara and Rathgeber, Andreas and Lameli, Alfred and Gaugler, Tobias, Sharing More than Dialects: Herding Behavior in Bank Risk-Taking Explained by Cultural Vicinity (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=2909878 or http://dx.doi.org/10.2139/ssrn.2909878

Barbara Seitz

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Andreas Rathgeber (Contact Author)

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

Alfred Lameli

University of Marburg ( email )

Tobias Gaugler

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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