Do investors in SMEs herd? Evidence from French and UK equity markets

According to the social learning literature, agents faced with asymmetries rationally ignore their own information to follow the herd. We argue that investors in listed SMEs that are known for their high informational opacity exhibit more herding compared to investors in large firms in order to lower the impact of informational asymmetries. Given a gap in the listed SMEs’ literature, we test our hypothesis offering first time evidence on their herding behavior. The results support our hypothesis. Herding is more prevalent among listed SMEs (known as micro-caps in the US) during normal periods, while during crisis periods, all micro-cap investors are faced with the same informational problem and do not herd because they expect that none of them has information of better quality. In addition, we reveal cross-market herding effects and a positive link of liquidity and herding. The results have implications for portfolio management and regulatory authorities among others.