Do Limit Orders Alter Inferences About Investor Performance and Behavior?

62 Pages Posted: 8 Dec 2003 Last revised: 8 Feb 2010

See all articles by Juhani T. Linnainmaa

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); University of Southern California - Marshall School of Business

Date Written: October 7, 2009

Abstract

Individual investors lose money around earnings announcements, experience poor post-trade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individuals in Finland, I find that investors’ use of limit orders is largely responsible for these trading patterns. These patterns arise mechanically because limit orders are price-contingent and face the adverse selection problem. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set’s susceptibility to this limit order effect.

Keywords: investor behavior, individual investors, limit order effect

JEL Classification: G11

Suggested Citation

Linnainmaa, Juhani T., Do Limit Orders Alter Inferences About Investor Performance and Behavior? (October 7, 2009). AFA 2004 San Diego Meetings; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=474222 or http://dx.doi.org/10.2139/ssrn.474222

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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