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Do Individual Investors Ignore Transaction Costs?

56 Pages Posted: 26 May 2017 Last revised: 23 Jun 2017

Deniz Anginer

World Bank Research

Xue Snow Han

San Francisco State University

Celim Yildizhan

University of Georgia - C. Herman and Mary Virginia Terry College of Business

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Date Written: May 19, 2017

Abstract

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

Anginer, Deniz and Han, Xue Snow and Yildizhan, Celim, Do Individual Investors Ignore Transaction Costs? (May 19, 2017). Available at SSRN: https://ssrn.com/abstract=2972845

Deniz Anginer

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

Xue Snow Han

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, CA 94132
United States

Celim Yildizhan (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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