Information cascades, short-selling constraints, and herding in equity markets

Abstract

This paper examines the relationship between informed trading and herding in Borsa_Istanbul. Our firm-level cross-sectional analysis assertsthat informed trading can significantly increase future herding levels. Furthermore, we show that the relationship between informed trading andherding intensifies under short-selling restrictions. Our results confirm the predictions of the informational cascades framework where the in-dividuals disregard their private information to follow others. We show that information cascades are relevant both for buy-side herding and sell-side herding. Short-selling restrictions may reinforce the herding behaviour since informed investors may not be able to clear out potential price misalignments.