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Effectiveness of warning signal and overconfident investors

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  • Inghelbrecht, Koen
  • Tedde, Mariachiara

Abstract

This study investigates the impact of the MiFID-mandated warning signal on curbing excessive trading behavior among investors. According to MiFID regulations, brokers must warn investors when a financial product is deemed inappropriate. Our theoretical model proposes that an effective warning signal can reduce investors demand for risky assets, thereby lowering transaction costs and potentially reducing broker profit. Furthermore, a salient warning signal may improve investors payoffs. Using a regression discontinuity design and a unique brokerage dataset, our empirical analysis confirms these propositions. We find that an effective warning signal is associated with reduced excessive trading, lower transaction costs, and, to some extent, better investor performance. Additionally, we examine the influence of investor overconfidence in financial literacy on the signal effectiveness, finding that overconfidence (partially) counteracts the signal impact.

Suggested Citation

  • Inghelbrecht, Koen & Tedde, Mariachiara, 2026. "Effectiveness of warning signal and overconfident investors," Journal of Banking & Finance, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:jbfina:v:184:y:2026:i:c:s0378426625002377
    DOI: 10.1016/j.jbankfin.2025.107617
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    Keywords

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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