The impact of foreign institutional herding on low-turnover stocks in the Taiwan stock market

This study uses panel threshold regression to analyze the impact of institutional herding behavior on abnormal stock returns in Taiwan. Our panel threshold model is constructed to explore whether or not and how the price impact of foreign institutional investorsʹ herding is modulated by stock turnover in the Taiwan stock market. The empirical results of this study find significant evidence of a threshold effect which divides the stocks into lower-turnover and higher-turnover firms. It is found that there is an apparent increase in the subsequent abnormal returns on lower-turnover stocks bought in bulk by foreign investors. To be specific, if other investors follow foreign investors by purchasing the stocks of lower-turnover firms on the TAIEX belonging to the Electronics and Textiles sectors and hold them for one month, the subsequent performance persistence is significantly better. The signals for combining the price impact of changes in share ownership by foreign institutional investors with stock liquidity reveal further information for improving the performance of asset reallocation decisions in Taiwan.