Psychological explanations for analysts' herding behavior: A study on the impact of information cascades and reputational concerns

This study investigates the influence of information cascades and reputational concerns on analysts' herding behavior in financial markets. Using a mixed-methods approach combining archival data analysis and surveys of 5,237 financial analysts covering S&P 500 companies from 2014 to 2023, we examine the interplay between these psychological factors. Our findings reveal that both information cascades and reputational concerns significantly impact herding behavior, with a notable synergistic effect when combined. Structural equation modeling demonstrates that information cascade strength positively correlates with herding behavior (β = 0.43, p < .001), partially mediated by perceived market consensus. Reputational concerns also show a strong positive association with herding (β = 0.51, p < .001), moderated by career stage. Importantly, the interaction between information cascades and reputational concerns (β = 0.24, p < .001) suggests that their combined effect is greater than the sum of their individual impacts. This effect varies across analyst characteristics and market conditions, with stronger influences observed in small-cap stocks and high-volatility periods. Time-series analysis reveals dynamic fluctuations in these effects over time, responding to significant market events. These results contribute to the theoretical understanding of financial market behavior by integrating social influence and career concern perspectives, offering insights for both scholars and practitioners in an increasingly complex market landscape.