The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes

Authors: Brown, Philip¹; Chappel, Nick²; Da Silva Rosa, Ray³; Walter, Terry⁴

Source: International Review of Finance, Volume 6, Numbers 1-2, March/June 2006 , pp. 43-78(36)

Buy & download fulltext article:

Price: $48.00 plus tax (Refund Policy)

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.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1468-2443.2007.00059.x

Affiliations: 1: The University of New South Wales, New South Wales, Australia, 2: Gresham Advisory Partners Limited, New South Wales, Australia 3: The University of Western Australia, Western Australia, Australia, 4: UNSW Asia, Singapore

Publication date: 2006-03-01