Financial Research Journal

Financial Research Journal

Retail Investor Attention and Herding Behavior

Document Type : Research Paper

Authors
Maryam Davallou 1
Arghavan Khalili 2
1 Associate Prof., Department of Financial Management and Insurance, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran.
2 MSc., Department of Financial Management, Faculty of Accounting and Management, Shahid Beheshti University, Tehran, Iran.
10.22059/frj.2025.391308.1007722
Abstract
Objective
Herding behavior is a type of behavioral bias in financial markets that can lead to irrational decision-making and deviation from the intrinsic value of assets. If not managed, this behavior increases market volatility and can result in the formation of price bubbles. The bursting of these bubbles leads to significant losses for investors and financial institutions. Individual investors, due to limited time, attention, and access to uniform and limited information sources, are unable to analyze all stocks. Therefore, it seems likely that, during trading, they are drawn to stocks that attract more attention. The primary aim of this study is to investigate the effect of individual (retail) investor attention on herding behavior in the Tehran Stock Exchange. Furthermore, the study compares the effect of investor attention on herding behavior between individual and institutional investors, and also examines differences in trading and order data. Finally, factors such as the intensity of price limit hits, company size, momentum, and investor sentiment are analyzed in relation to this behavior

Methods
To test the effect of individual investor attention on herding behavior, a panel data regression approach was used. Herding behavior is calculated using the LSV and FHW models as upper and lower bounds of the true value of this behavior. Investor attention is measured through the Google Search Volume Index (ASVI) and abnormal trading volume (AVOL). In this model, to control for the effects of other influencing variables, institutional investor herding behavior, stock returns, the inverse of the P/E ratio, trading volume, standard deviation of stock returns, market capitalization, and information demand are included as control variables. To further examine this effect, companies are divided into two groups based on the median size (large and small companies) and median momentum (high and low momentum). The model is separately estimated for each group, and the results are compared. Finally, the effect of investor sentiment, measured by the Arms index, is also investigated, and the effect of attention on herding behavior is separately analyzed in both positive and negative sentiment conditions. Data were collected monthly, covering active companies in the Tehran Stock Exchange from 2009 to September 2023.

Results
The findings of this study indicate that individual investors' attention plays a key role in the formation and intensification of herding behavior in the Tehran Stock Exchange. Increased attention is often driven by investors' preferences for specific stocks, leading to reduced diversity in trading decisions and greater behavioral convergence. The relationship between attention and herding behavior becomes more significant when this attention spreads widely across the market, with many investors relying on the decisions of others without thorough analysis. Research has shown that, under conditions of increased attention, individual investors exhibit stronger herding behavior due to limited information and higher susceptibility to market sentiment. This widespread attention directs investors towards similar decisions, ultimately resulting in herding behavior. Furthermore, psychological factors such as positive sentiment attract more attention to stocks, and the prevailing optimism among investors exacerbates herding behavior. Additionally, well-known and large companies, due to their reputation and media coverage, tend to attract more attention, creating a favorable environment for the formation of herding behavior. Similarly, stocks with low momentum are more likely to attract attention due to concerns about losses or the possibility of price reversals, further intensifying herding behavior. Overall, the findings emphasize the importance of individual investors' attention in shaping herding behavior and demonstrate that as individual investors' attention increases, the tendency for group decisions and convergence in the market grows stronger.

Conclusion
Investors' attention, especially that of individual investors, is a key factor in the formation of herding behavior. Increased attention to specific stocks leads to reduced decision-making diversity and greater convergence among investors. Large companies, due to media coverage, and stocks with low momentum, due to concerns about losses, are more susceptible to this behavior. Market sentiment also strengthens herding behavior in positive conditions and intensifies emotional reactions in negative ones. In addition to individual investors, institutional investors' behavior also impacts this process, as it can act as a signal for retail investors. These findings align with behavioral finance theories, showing that investor decisions are shaped not only by information but also by psychological factors and the behavior of others.
Keywords
Herding behavior
Investor attention (Retail)
Investor sentiment
Momentum
Price limit
Subjects
 
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Financial Research Journal
Volume 28, Issue 3
2026
Pages 742-770