Regulatory mood-congruence and herding: Evidence from cannabis stocks

Although social mood can motivate herding towards new industries, the extent to which regulators cater to social mood may affect that herding. We explore this issue in the context of the nascent cannabis industry by examining herding among the cannabis stocks listed in the US and Canada, where the regulatory treatment of cannabis varies in its congruence with the prevailing social mood on cannabis’ legalization. Canadian-listed cannabis stocks entail strong herding across all market states and sectors, alongside most capitalization-segments; conversely, herding among their US-listed counterparts is relatively limited, appearing on up-market/high-volume days, for the smallest capitalization segment, as well as for several cannabis-sectors. Herding is present (almost always absent) around cannabis’ legalization announcement-days in Canada (the US), while cross market herding between US- and Canadian-listed cannabis stocks is very weak. We attribute Canadian (US) cannabis stocks’ strong (weak) herding to cannabis’ more (less) mood-congruent regulatory treatment, which promotes (reduces) certainty and encourages investors to herd more (less) on them.