Sharing more than dialects: Herding behavior in bank risk-taking explained by cultural vicinity

We expand on research concerning the well-pronounced influence of geographical peer groups on human behavior. For this purpose, bank-specific risk-taking behavior and its relation to culturally close banks – measured by geographical as well as linguistic distance – is examined. We hypothesize that the level of risk taken by an distinct bank can be explained by the risk-taking behavior of other culturally close banks. Using a complete panel survey of all 1,111 separate and independent German cooperative banks from 2007 to 2010, we show with a high level of significance that banks adapt to the behavior of their culturally defined peer group. Interestingly, linguistic distance is superior to the geographical proxy. Results are robust after controlling for typical macroeconomic, bank specific, and – to eliminate unintentional herding – regional determinants. Our results are also robust to common econometrical and economic specifications. We amend existing literature on geographical herding firstly by a full census of German cooperative banks. As each cooperative bank is privileged with territorial exclusivity, our research is based on an intersect-free full coverage of the entire national territory. Secondly, we are able to refine research on geographical herding by measuring cultural vicinity via linguistic, i.e. dialect, proximity. Based on the evidence of banks selecting their peer group not by a “best-in-class” approach, but rather by dialectical proximity, we can show evidence of irrational herding resulting from psychosociological phenomena, such as mere exposure, as well as conformity effects. EFM classification code / keywords: 120 Behavioural Issues / behavioral finance, herding, bank risk-taking, linguistics, cultural area, German cooperative banks 1 Tigerbergstr. 9 | CH-9000 St. Gallen | +41 78 824 33 34 | [email protected]. 2 Acknowledgements: Earlier versions of this paper were presented (1) at the 3 CEQURA-Junior Research Workshop 2014 on “Advances in Financial and Insurance Risk Management” on September 30, 2014 organized by the Center for Quantitative Risk Analysis of Ludwig-Maximilians-Universität (LMU) Munich, (2) at the Annual Conference 2015 of the Multinational Finance Society (MFS) from June 28, 2015 to July 1, 2015 in Halkidiki, Greece, and (3) at the Annual Conference of the British Accounting & Finance Association (BAFA) from March 21 to 23, 2016 in Bath, UK. We thank our discussants Wendy Rotenberg, Vasileios Kallinterakis, and all conference participants for many helpful comments. We are grateful to Benedikt Gleich and Christian Stepanek for valuable support. 3 Universitätsstr. 2 | D-86135 Augsburg | +49 821 598 3040 | [email protected]. 4 Pilgrimstein 16 | D-35032 Marburg | +49 6421 28 22482 | [email protected]. 5 Universitätsstr. 2 | D-86135 Augsburg | +49 821 598 3050 | [email protected].