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Disposition sales and stock market liquidity

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  • Choi, Darwin

Abstract

I examine the impact of the V-shaped disposition effect, which results in uninformed sales when investors realize large gains and losses. Adverse selection risk is reduced in the presence of more uninformed sales. I show in a model that market makers should post tighter bid-ask spreads and quote prices that are less sensitive to sales. Using stocks with merger and acquisition announcements, which increase the magnitude of investors' unrealized gains or losses and trigger disposition sales in the post-announcement period, I find evidence supporting these predictions.

Suggested Citation

  • Choi, Darwin, 2019. "Disposition sales and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 45(C), pages 19-36.
    • Handle: RePEc:eee:finmar:v:45:y:2019:i:c:p:19-36
    DOI: 10.1016/j.finmar.2019.04.003
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    More about this item

    Keywords

    V-shaped disposition effect; Uninformed traders; Liquidity; Price impact;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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