The Information Content of Realized Losses

Abstract

Examining the trades of company insiders, I find that a sale of stock at a loss is a much more negative signal about future returns than a sale of stock at a gain. I consider a range of explanations for my results and find that the evidence is most consistent with the idea that investors derive direct disutility from selling a stock at a loss. Since selling a stock at a loss is painful, an investor who sells at a loss must have particularly negative information. This result offers a novel measurement of the strength of the disposition effect.

Keywords: realization utility, insider trading, disposition effect, behavioral finance

JEL Classification: G12