Premium
The impact of signal dependence and own ability awareness on herding behaviour: a tale of two managers
Author(s) -
Dassiou Xeni
Publication year - 1999
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/1099-1468(199911)20:7<379::aid-mde955>3.0.co;2-#
Subject(s) - herding , signal (programming language) , business , economics , econometrics , psychology , computer science , geography , forestry , programming language
This model examines the case of managers whose signals, when informative, are perfectly correlated as in the Scharfstein and Stein model [1990. The American Economic Review 80(3): 465–479]. This has a herd increasing impact as it introduces a positive reputation externality. On the other hand, it is also assumed that managers have perfect knowledge of their own ability, an assumption with herd reducing implications. Combining these two offsetting, in terms of herding, assumptions, it is found that a smart manager who plays first will sometimes, but not always, truthfully announce his/her private information. On the other hand, a smart manager who plays second will always report his/her true signal, while a dumb manager who plays second may herd, either on the first manager's action and/or on the prior. It is also found that the more likely a dumb manager who plays second is to herd on the first manager's action, the less likely is a smart manager who plays first to herd on the prior. Copyright © 1999 John Wiley & Sons, Ltd.