Herding behavior and financing decisions in Romania

Purpose: The purpose of this paper is to investigate the financing behavior of Romanian listed firms with regard to their tendency to exhibit herding behavior, more specifically to follow the mean capital structure of the sector they belong to. Design/methodology/approach: A panel data model was employed to examine the herding financing behavior of Romanian listed firms over the period 2007–2014. The dependent variable of the model is firms’ debt ratio (DR) and the independent variables are: the first lag of the mean DR in each sector of the analysis, firm-specific characteristics and the average characteristics of the firms from the sector they belong to. Findings: The results of the study indicate that Romanian listed firms have a herding behavior and try to reach the mean DR of the sector they belong to, moving away from the optimal capital structure that maximizes firms’ value. In addition, the results of the model estimation suggest that Romanian firms’ capital structure depends on both firms’ characteristics (i.e. profitability, firm size and asset tangibility) and the average characteristics of the firms from the same sector they belong to (i.e. average profitability and average size). Practical implications: Acting with the herd determines firms to move away from the optimal capital structure and to miss in this way the maximization of the firm value. Consequently, it is in managers’ best interest to avoid herding behavior and try to act rationally when they decide firms’ financing sources. Originality/value: To the best of the knowledge, this is the first study in the literature that finds support for the herding financing behavior in an Eastern European country.