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The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-

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  • Philip Brown
  • Nick Chappel
  • Ray Da Silva Rosa
  • Terry Walter

Abstract

We examine detailed daily Australian Stock Exchange share registry data for investors in IPO and index stocks between 1995 and 2000 and find that the 'disposition effect,' investors' reluctance to crystallize losses and relative eagerness to realize gains, is pervasive across investor classes. However, traders instigating larger investments tend to be affected less by the disposition bias. Our novel findings include that (a) the disposition effect ameliorates over time, being undetectable from around 200 trading days after purchase, (b) the 'house money' effect tempers the disposition effect, (c) shareholder loyalty schemes also partially offset investors' relative preference for selling winning stocks, and (d) the reversal of the disposition effect in June (the last month of the Australian tax year) does not occur among investors unable to take advantage of tax shields. In line with earlier research, our results support a tax-related explanation for the June effect rather than window dressing or momentum explanations. Finally, we confirm Odean's finding that the disposition effect is not driven by diversification motives, or by higher transaction costs associated with lower-priced stocks. Copyright (c) International Review of Finance Ltd. 2007.

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Bibliographic Info

Article provided by International Review of Finance Ltd. in its journal International Review of Finance.

Volume (Year): 6 (2006)
Issue (Month): 1-2 ()
Pages: 43-78

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Handle: RePEc:bla:irvfin:v:6:y:2006:i:1-2:p:43-78

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Cited by:
  1. William N. Goetzmann & Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," NBER Working Papers 9499, National Bureau of Economic Research, Inc.
  2. Mattos, Fabio, 2012. "Do producers exhibit disposition effect? Evidence from grain marketing," Working Papers 125279, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  3. Patrick Roger, 2007. "Does the consciousness of the disposition effect increase the equity premium?," Working Papers of LaRGE Research Center 2007-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
  4. Moser, Riccarda & Raffaelli, Roberta & Notaro, Sandra, 2010. "The Role Of Production Methods In Fruit Purchasing Behaviour: Hypothetical Vs Actual Consumers’ Preferences And Stated Minimum Requirements," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116426, European Association of Agricultural Economists;Agricultural and Applied Economics Association.
  5. Uri Ben-Zion & Sharon Shafran & TAL SHAVIT, 2007. "Investors’ Decision To Trade Stocks – An Experimental Study," Working Papers 0708, Ben-Gurion University of the Negev, Department of Economics.
  6. Weber, Martin & Welfens, Frank, 2007. "An Individual Level Analysis of the Disposition Effect: Empirical and Experimental Evidence," Sonderforschungsbereich 504 Publications 07-45, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  7. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
  8. Mosi Rosenboim & Tal Shavit, 2012. "Whose money is it anyway? Using prepaid incentives in experimental economics to create a natural environment," Experimental Economics, Springer, vol. 15(1), pages 145-157, March.

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