62 Pages Posted: 8 Dec 2003 Last revised: 8 Feb 2010
Date Written: October 7, 2009
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: 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