The Reach of the disposition effect: large sample evidence across investor classes

Philip Brown, Nick Chappel, Ray da Silva Rosa, Terry Walter

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)43-78
Number of pages36
JournalInternational Review of Finance
Volume6
Issue number1-2
DOIs
Publication statusPublished - 2006
Externally publishedYes

Fingerprint Dive into the research topics of 'The Reach of the disposition effect: large sample evidence across investor classes'. Together they form a unique fingerprint.

Cite this