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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.

Suggested Citation

  • Philip Brown & Nick Chappel & Ray Da Silva Rosa & Terry Walter, 2006. "The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes-super-," International Review of Finance, International Review of Finance Ltd., vol. 6(1-2), pages 43-78.
  • Handle: RePEc:bla:irvfin:v:6:y:2006:i:1-2:p:43-78
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    Citations

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    Cited by:

    1. Lucchesi, Eduardo Pozzi & Yoshinaga, Claudia Emiko & Castro, Francisco Henrique Figueiredo de, 2015. "Efeito disposição entre gestores brasileiros de fundos de ações," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 55(1), January.
    2. Massimo Massa & William Goetzmann, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," Yale School of Management Working Papers ysm333, Yale School of Management, revised 01 Apr 2005.
    3. Young Doo Kim & Young-Won Ha, 2016. "Who is afraid of disposition of financial assets? The moderating role of regulatory focus in the disposition effect," Marketing Letters, Springer, vol. 27(1), pages 159-169, March.
    4. Tõnn Talpsepp, 2010. "Does Gender and Age Affect Investor Performance and the Disposition Effect?," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 2(1).
    5. Mosi Rosenboim & Tal Shavit, 2012. "Whose money is it anyway? Using prepaid incentives in experimental economics to create a natural environment," Experimental Economics, Springer;Economic Science Association, vol. 15(1), pages 145-157, March.
    6. Tekçe, Bülent & Yılmaz, Neslihan & Bildik, Recep, 2016. "What factors affect behavioral biases? Evidence from Turkish individual stock investors," Research in International Business and Finance, Elsevier, vol. 37(C), pages 515-526.
    7. 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).
    8. Goulart, Marco & da Costa, Newton C.A. & Andrade, Eduardo B. & Santos, André A.P., 2015. "Hedging against embarrassment," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 310-318.
    9. repec:eco:journ3:2018-03-10 is not listed on IDEAS
    10. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
    11. 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.
    12. Ormos, Mihály & Joó, István, 2014. "Are Hungarian investors reluctant to realize their losses?," Economic Modelling, Elsevier, vol. 40(C), pages 52-58.
    13. Weber, Martin & Welfens, Frank, 2007. "An individual level analysis of the disposition effect : empirical and experimental evidence," Papers 07-45, Sonderforschungsbreich 504.
    14. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, Elsevier.
    15. Carlos Cueva Herrero & Iñigo Iturbe-Ormaetxe Kortajarene & Giovanni Ponti & Josefa Tomás Lucas, 2016. "The disposition effect: who and when?," Working Papers. Serie AD 2016-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    16. 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.
    17. Frino, Alex & Lepone, Grace & Wright, Danika, 2015. "Investor characteristics and the disposition effect," Pacific-Basin Finance Journal, Elsevier, vol. 31(C), pages 1-12.
    18. 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.

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