Do Individual Investors Ignore Transaction Costs?
56 Pages Posted: 26 May 2017 Last revised: 23 Jun 2017
Date Written: May 19, 2017
Using close to 800,000 (2,000,000) transactions by 66,000 (303,000) households in the United States (in Finland), we show that individual investors with longer holding periods choose to hold less liquid stocks in their portfolios, consistent with Amihud and Mendelson’s (1986) theory of liquidity clienteles. The relationship between holding periods and transaction costs is stronger amongst more financially sophisticated households. Households whose holding periods are positively related to transaction costs also earn higher gross returns on their investments before accounting for transaction costs, suggesting that attention to non-salient transaction costs is an indication of investing ability. We confirm our findings by analyzing changes to investors’ holding periods around exogenous shocks to stock liquidity.
Keywords: Individual Investors' Liquidity Decisions, Individual Investors' Rationality, Liquidity Decisions and Trading Ability, Attention to Non-Salient Transaction Costs and Rationality
JEL Classification: G11, G12, G14, G32, G33, M4, L14, D82
Suggested Citation: Suggested Citation