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The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes *
Author(s) -
Brown Philip,
Chappel Nick,
Da Silva Rosa Ray,
Walter Terry
Publication year - 2006
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2007.00059.x
Subject(s) - disposition effect , disposition , monetary economics , business , diversification (marketing strategy) , transferability , shareholder , equity (law) , stock (firearms) , database transaction , economics , financial economics , finance , microeconomics , incentive , marketing , corporate governance , psychology , mechanical engineering , social psychology , paleontology , context (archaeology) , programming language , political science , computer science , law , biology , engineering
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.