Do firm characteristics matter in explaining the herding effect on returns?

This paper explores whether firm characteristics matter in determining the effect of investor herding on asset returns. We find that the level of herding alone does not command a significant effect on industry returns, implied by insignificant return spreads between industries that experience high and low degrees of herding. On the other hand, we observe that herding has a significant interaction with size and past returns. We find that small firms with high level of herding significantly underperform small firms that experience low herding. Similarly, past loser industries with high level of herding significantly outperform loser industries with low herding. No significant interactions between book-to-market and market beta with herding are observed. Overall, the findings suggest that the herding effect presents itself via size and momentum channels with significant investment implications.