Objective - This study investigates the phenomenon of herding behavior among investors in Indonesia's Shariah banks. In this situation, market participants tend to follow prevailing market trends without engaging in comprehensive fundamental analysis.

Methodology/Technique – Specifically, the research examines the influence of investors' religious understanding as a mediating variable on their decision-making processes within the Shariah financial sector. Notably, the study addresses whether investors are more inclined to mimic market movements or rely on independent analysis when investing in Sharia-compliant banks. It is commonly observed that rumors can precipitate rash trading decisions among investors, leading to the buying or selling of shares even in the absence of substantial changes in asset fundamentals (Bommel, 2003).

Findings – Employing a quantitative approach, this study utilizes path analysis to explore the impact of religious understanding on herding behavior. Although prior research has extensively investigated herding behavior, the introduction of religious understanding as a mediating variable offers a new dimension to assess the correlation between religiosity and market behavior. This aspect has not been widely examined in previous segmentations. The sample comprises data from 15 Islamic Banks in Indonesia, analyzed using associative data analysis techniques with AMOS software. Findings indicate significant positive relationships between stock returns and herding behavior, trading volume and herding behavior, and the level of Islamic understanding and herding behavior in these banks.

Novelty – However, these relationships do not hold when Islamic understanding is applied as a mediating variable. This suggests that the level of religious understanding acts as a direct influencer rather than a mediator in herding behavior among investors in Indonesian Islamic banks.

Type of Paper - Empirical

Keywords: Herding behavior, Stock returns, Trading volume, Level of Understanding of Islam.

JEL Classification: G41, D81, C58.

URI: http://gatrenterprise.com/GATRJournals/JFBR/vol9.1_1.html

DOI: https://doi.org/10.35609/jfbr.2024.9.1(1)

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