Does Institutional Herding Tendency and Direction Destabilizes Stock Prices?

We introduce a new methodology to categorize institutional herding tendency and direction, that enhances the precision with which herders are identified at the institutional level. The herders are the ones that follow the crowd both on the buy and sell trades, whereas anti-herders are the institutions that tend to move in the opposite direction of the crowd on both sides of the trades. We then focus on the link between institutional herding and stock returns within the context of banks, insurance companies, investment companies, investment advisors, and education endowment funds by using the proposed herding categorization. The results show that herders' trading negatively affects future stock returns, whereas anti-herders' trading is insignificant. Consequently, herders' trading brings a temporary shift in stock prices that is eventually reversed. Thus, herders destabilize stock prices and negatively affect the stock price discovery process