Herding Behavior on Stock Market Investment Decisions

Abstract

The effect of herding behavior in the stock market is analyzed using evidence from the retail investor segment of the Nepal Stock Exchange (NEPSE). Herding behavior occurs when investors copy each other and make investment decisions based on the actions of other investors rather than their own analysis and independent judgment. The study employed a causal comparative research design to examine the effect of herding behavior among retail investors in Nepal. Primary data collected from retail investors who are active market participants in NEPSE constitutes the main source of information. A total of 200 responses were collected using a structured questionnaire. The results suggest that herding behavior has a statistically significant impact on investment decision-making and market participation by retail investors. Specifically, investment sentiment, market volatility, information asymmetry, and past market returns were all found to significantly influence investment decisions. The regression model explained 36.0% of the variance in investment decisions (R² = .360, F = 27.427, p < .001). The study carries implications for investors, policymakers, market regulators, and financial institutions in raising awareness about behavioral biases and in formulating measures to make the stock market more efficient.