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

33 Pages Posted: 21 Mar 2002

See all articles by Philip R. Brown

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

Nick Chappel

University of Sydney Business School

Raymond da Silva Rosa

The University of Western Australia - Department of Accounting and Finance; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

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 crystallise losses and relative eagerness to realise gains, is pervasive across investor classes, however, traders instigating larger investments tend to be less, if not entirely unaffected by the disposition bias. Our novel findings include (a) that the disposition effect ameliorates over time, being undetectable in our tests from around 200 trading days after purchase, (b) the "house money" effect tempers the disposition effect, (c) shareholder loyalty schemes also partially off-set investors' relative preference for selling winning stocks, and (d) the reversal of the disposition effect in June (the last month of the fiscal 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 effect explanations. Finally, our tests confirm Odean?s (1998) finding that the disposition effect is not driven by diversification motives, or to avoid higher transaction costs associated with lower priced stocks.

Keywords: Disposition effect, behavioural finance, tax-loss selling, house-money effect, prospect theory

JEL Classification: G12, G14

Suggested Citation

Brown, Philip R. and Chappel, Nick and da Silva Rosa, Raymond and Walter, Terry Stirling, The Reach of the Disposition Effect: Large Sample Evidence Across Investor Classes (January 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=302655 or http://dx.doi.org/10.2139/ssrn.302655

Philip R. Brown

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Nick Chappel

University of Sydney Business School ( email )

Raymond Da Silva Rosa (Contact Author)

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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