The Effect of Corporate Governance Capacity on Herd Behavior

Year 2024, Volume: 24 Issue: 4, 639 - 650, 01.11.2024

Esra Özkahveci , Fatih Konak , Sabiha Kılıç

https://doi.org/10.21121/eab.20240410

Abstract

Behavioral finance, which rejects the basic assumption of traditional finance and argues that individuals do not always act rationally and that psychological factors have an effect on investor behavior, reveals the effect of cognitive biases and emotional factors on the investor. Herd behavior, which is one of these emotional factors, is to imitate the behavior of others in its most general definition. In addition, herd behavior, which affects investor behavior and therefore financial markets, is a behavioral attitude that shows that investors act together. On the other hand, corporate governance, which is becoming increasingly important by businesses, is a system in which company activities are managed and controlled. Enterprises with the highest corporate governance rating score can be included in the Borsa Istanbul Corporate Governance Index. The main purpose of working within the framework of herd behavior and corporate governance is to reveal the possible effect of corporate governance rating on herd behavior from a different perspective. In this context, the Christie and Huang (1995) Model and the Chang, Cheng and Khorana (2000) Model are used in the research. In terms of herd behavior, no herding behavior was found in 16 other prominent indices in Borsa Istanbul according to the results of Christie and Huang (CH) Model, while herd behavior was detected in some indices according to the results of Chang, Cheng and Khorana (CCK) Model. In addition, no evidence was found in favor of herd formation according to both the CH Model and the CCK Model in companies included in the Corporate Governance Index within the scope of herd behavior and grouped as high/low corporate governance score within the framework of the determined criteria.

Keywords

Behavioral Finance, Herd Behavior, Corporate Governance Rating, Borsa İstanbul

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